CPA Reg Review

D This answer is correct. If an individual never made a nondeductible contribution to a traditional IRA, then any distributions from the IRA are fully taxable as ordinary income. Also, if the individual is under age 59½, the distribution is generally subject to the 10% penalty tax for early distributions. Here, the $30,000 distribution would be taxed at the taxpayer's marginal rate of 35% resulting in a tax of $10,500. Additionally, there will be a penalty tax of 10% × $30,000 = $3,000, because of having received the distribution before age 59½, resulting in a total tax liability of $13,500.

A 33-year-old taxpayer withdrew $30,000 (pretax) from a traditional IRA. The taxpayer has a 33% effective tax rate and a 35% marginal tax rate. What is the total tax liability associated with the withdrawal? A. $10,000 B. $10,500 C. $13,000 D. $13,500

C Form 1040X, Amended U.S. Individual Income Tax Return, should be used to claim a refund of erroneously paid income taxes.

A claim for refund of erroneously paid income taxes, filed by an individual before the statute of limitations expires, must be submitted on Form A. 1139. B. 1045. C. 1040X. D. 843.

C A simple trust is one that (1) is required to distribute all of its income to designated beneficiaries every year, (2) has no beneficiaries that are qualifying charitable organizations, and (3) makes no distributions of trust corpus (i.e., principal) during the year. A complex trust is any trust that is not a simple trust.

A complex trust is a trust that A. Must distribute income currently, but is prohibited from distributing principal during the taxable year. B. Invests only in corporate securities and is prohibited from engaging in short-term transactions. C. Permits accumulation of current income, provides for charitable contributions, or distributes principal during the taxable year. D. Is exempt from payment of income tax since the tax is paid by the beneficiaries.

D To qualify as an S corporation, a corporation must have 100 or fewer shareholders who are individuals (other than nonresident aliens), certain trusts, or estates (including bankruptcy estates). If a corporation has been an S corporation since its inception, there is no limitation on the amount or type of income that it generates, and it can have both passive and nonpassive income.

A corporation that has been an S corporation from its inception may Have both Be owned passive and nonpassive by a bankruptcy estate income A. No Yes B. Yes No C. No No D. Yes Yes

A Cosureties exist when more than one surety is bound to answer for the same debt or duty of a debtor, and who, as between themselves, should proportionately share the loss caused by the default of the debtor. The right of contribution arises when a cosurety, in performance of the debtor's obligation, pays more than his proportionate share. This entitles the cosurety to compel the other cosureties to compensate him/her for the excess amount paid. Contribution is the right which only a cosurety is entitled to.

A distinction between a surety and a cosurety is that only a cosurety is entitled to A. Contribution. B. Exoneration. C. Subrogation. D. Reimbursement (Indemnification).

C Distributable net income (DNI) is the maximum amount of distributions that can be taxed to beneficiaries as well as the maximum amount of distributions deduction for an estate.

A distribution from estate income, that was currently required, was made to the estate's sole beneficiary during its calendar year. The maximum amount of the distribution to be included in the beneficiary's gross income is limited to the estate's A. Capital gain income. B. Ordinary gross income. C. Distributable net income. D. Net investment income.

C This answer is correct. The self-employed taxpayer's gross income of $57,000 would be reduced by a deduction for 50% of self-employment taxes paid (50% × $8,000 = $4,000), a deduction for 100% of health insurance premiums ($6,000), and the $2,000 contributed to a traditional IRA, resulting in AGI of $45,000. Alimony paid for divorces finalized after 2018 is not deductible.

A self-employed taxpayer had gross income of $57,000. The taxpayer paid self-employment tax of $8,000, health insurance of $6,000, and $5,000 of alimony from a divorce finalized after 2018. The taxpayer also contributed $2,000 to a traditional IRA. What is the taxpayer's adjusted gross income for 2019? A. $55,000 B. $50,000 C. $45,000 D. $40,000

C Land is not depreciable. Section 179 can be elected to expense the $450,000 of business assets since it does not exceed the maximum Section 179 limit of $1,020,000 as given in the problem.

A taxpayer purchased five acres of land for $200,000 and placed in service other tangible business assets that cost $450,000. Disregarding business income limitations and assuming that the annual Section 179 (Election to Expense Certain Depreciable Business Assets) limit is $1,020,000, what maximum amount of cost recovery can the taxpayer claim this year? A. $650,000 B. $520,000 C. $450,000 D. $200,000

D According to Treasury Department Circular 230, a practitioner may charge a contingent fee for representing a client in connection with a judicial proceeding.

According to Treasury Department Circular 230, a practitioner may A. Charge a contingent fee for preparing a client's original tax return. B. Charge any amount of fixed fee for tax work. C. Retain a client's records for nonpayment of fees. D. Charge a contingent fee for representing a client in connection with a judicial proceeding.

D This answer is correct. It is not required by law.

Accountants that prepare tax returns should be familiar with federal laws and regulations with respect to the privacy of client information. These laws and regulations include all of the following provisions except: A. Accountants are prohibited from disclosing to a nonaffiliated third party any nonpublic personal information about their clients. B. Accountants are required to develop, implement, and maintain a comprehensive information security program that outlines the ways in which they protect client information. C. Accountants are responsible for maintaining the confidentiality of information that is outsourced for processing. D. Accountants are required to notify their clients that the accountants are providing their confidential information to outsourcing firms for processing.

D The transaction would qualify as a tax-free event for Carr because it would be considered to be a Section 351 transfer. Under Section 351, no gain or loss is recognized if the property is transferred solely for the exchange of stock of the corporation, if immediately after the transfer the transferring taxpayer or taxpayers have control over the corporation. Control is defined as owning at least 80% of corporation's voting stock and at least 80% of the corporation's other classes of stock. Since Beck and Carr together own 90% of the corporation immediately after the transfer, the transaction would be a tax-free event for both taxpayers.

Adams, Beck, and Carr organized Flexo Corp. with authorized voting common stock of $100,000. Adams received 10% of the capital stock in payment for the organizational services that he rendered for the benefit of the newly formed corporation. Adams did not contribute property to Flexo and was under no obligation to be paid by Beck or Carr. Beck and Carr transferred property in exchange for stock as follows: Adjusted basis Fair market value % of Flexo stock acquired Beck 5,000 20,000 20% Carr 60,000 70,000 70% What amount of gain did Carr recognize from this transaction? A. $40,000 B. $15,000 C. $10,000 D. $0

C Correct! Their daughter is a qualifying child (i.e., she did not provide more than half of her own support, and she is a full-time student under age 24). Their son is a qualifying relative (i.e., they provided more than half of his support, and his gross income was less than $4,200). No exemption is allowable for Mrs. Stoner's father since he was neither a US citizen nor resident of the United States, Canada, or Mexico. Thus, the Stoners have two individuals who qualify as dependents.

Albert and Lois Stoner, age 66 and 64, respectively, filed a joint tax return for 2019. They provided all of the support for their blind 19-year-old son, who has no gross income. Their 22-year-old daughter, a full-time student until her graduation on June 14, 2019, earned $8,000, which was 40% of her total support during 2019. Her parents provided the remaining support. The Stoners also provided the total support of Lois's father, who is a citizen and lifelong resident of Peru. How many individuals qualify as a dependent for the Stoners? A. 0 B. 1 C. 2 D. 3

C When individual taxpayers make charitable contributions in connection with admission to an entertainment event, the individual taxpayer only may deduct the difference between amount paid for admission and the fair value of admission. As the taxpayer is viewed as receiving services equal to the fair value of admission, only the portion exceeding the fair value of admission is viewed as a gift. The Burgs purchased four tickets to a theater party sponsored by a qualified charitable organization for $160. The fair market value of the tickets was $100. Hence, the Burgs may deduct $60 for gifts to charity in their itemized deductions on Schedule A for 2019, the amount paid for admission less the fair value of admission. This response erroneously indicates that the Burgs may not claim any deduction for their charitable contributions because value was received.

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their 2019 adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A for 2019. The following unreimbursed cash expenditures were among those made by the Burgs during 2019: Repair and maintenance of motorized wheelchair for physically handicapped dependent child $ 300 Tuition, meals and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care 4,000 State income tax 1,200 Self-employment tax 7,650 Four tickets to a theater party sponsored by a qualified charitable organization; not considered a business expense; similar tickets would cost $25 each at the box office 160 Repair of glass vase accidentally broken in home by dog; vase cost $500 in 2012; fair value $600 before accident and $200 after accident 90 Fee for breaking lease on prior apartment residence located 20 miles from new residence 500 Security deposit placed on apartment at new location 900 What amount should the Burgs deduct for gifts to charity in their itemized deductions on Schedule A? A. $160 B. $100 C. $60 D. $0

A A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Deductible casualty losses may result from earthquakes, tornadoes, floods, fires, vandalism, auto accidents, etc. However, a loss due to the accidental breakage of household articles such as glassware or china under normal conditions is not a casualty loss. Neither is a loss due to damage caused by a family pet.

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their 2019 adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A for 2019. The following unreimbursed cash expenditures were among those made by the Burgs during 2019: Repair of glass vase accidentally broken in home by dog; vase cost $500 in 2014; fair value $600 before accident and $200 after accident $90 Without regard to the $100 "floor" and the adjusted gross income percentage threshold, what amount should the Burgs deduct for the casualty loss in their itemized deductions on Schedule A for 2019? A. $0 B. $ 90 C. $300 D. $400

D This answer is correct because the leasing arrangement, to which Allen is a surety, remained intact with no modifications. The lease, itself, expressed a holdover clause which went into existence when Lear remained in possession after the original leasing period. The essence of a surety arrangement is that the surety promises to perform upon default of the principal debtor. Therefore, Allen becomes liable when Lear defaults during the extended term of the lease.

Allen was the surety for the payment of rent by Lear under a lease from Rosenthal Rentals. The lease was for 2 years. A clause in the lease stated that at the expiration of the lease, the lessee had the privilege to renew upon 30 days' prior written notice or, if the lessee remained in possession after its expiration, it was agreed that the lease was to continue for 2 years more. There was a default in the payment of rent during the extended term of the lease and Rosenthal is suing Allen for the rent due based upon the guarantee. Allen contends that he is liable only for the initial term of the lease and not for the extended term. Allen is A. Not liable since it does not appear that a judgment against Lear has been returned unsatisfied. B. Not liable because there has been a material alteration of the surety undertaking. C. Not liable because there was a binding extension of time. D. Liable on the surety undertaking which would include the additional 2 years.

C This answer is correct. Although an S corporation generally must use a calendar year, it may request permission from the IRS to have a fiscal year if it can establish a valid business purpose. Here, the S corporation already has a fiscal year ending June 30, and the corporation will be allowed to continue that June 30 fiscal year when it switches to a C corporation. That is because a C corporation may elect to use either a calendar year or a fiscal year as its annual accounting period. In contrast, C corporations are generally not allowed to use the cash method of accounting. A limited exception that permits the use of the cash method is available if the C corporation is a qualified personal service corporation, or if the C corporation for every year has average gross receipts of $25 million or less for any prior three-year period and does not have inventories. Since this S corporation is engaged in manufacturing and has annual revenues in excess of $30 million, it does not qualify for either exception and will be required to use the accrual method of accounting if it changes to a C corporation.

An S corporation engaged in manufacturing has a year-end of June 30, 2019. Revenue consistently has been more than $30 million under both cash and accrual basis of accounting. The stockholders would like to change the tax status of the corporation to a C corporation using the cash basis with the same year-end. Which of the following statements is correct if it changes to a C corporation? A. The year-end will be December 31, using the cash basis of accounting. B. The year-end will be December 31, using the accrual basis of accounting. C. The year-end will be June 30, using the accrual basis of accounting. D. The year-end will be June 30, using the cash basis of accounting.

D Items having no special tax characteristics can be netted together in the computation of the S corporation's ordinary income or loss, with only the net amount passed through to shareholders. Thus, only ordinary items (e.g., amortization of organizational expenditures) can be deducted by an S corporation.

An S corporation may deduct A. Foreign income taxes. B. A net Section 1231 loss. C. Investment interest expense. D. The amortization of organizational expenditures.

B This answer is correct. Under the accrual method, an item is generally included in gross income for the year in which it is earned, regardless of when income is collected. An item of income is earned when all the events have occurred to fix the taxpayer's right to receive the income, and the amount of income can be determined with reasonable accuracy.

An accrual-basis taxpayer should report gross income A. When income is either actually or constructively received, whether in cash or in property. B. When "all events" have occurred that fix the taxpayer's right to receive the item of income, and the amount can be determined with reasonable accuracy. C. When income is either actually or constructively received in cash only. D. When "all events" have occurred that fix the taxpayer's right to receive the item of income, and the amount can be determined with absolute certainty.

A This answer is correct. An agency coupled with an interest will be created any time the agent has either a property interest or a security interest in the subject matter of the agency. If a lender obtains authorization to sell pledged securities and applies the proceeds to the loan in the event of the borrower's default, that lender becomes an agent with a security interest in the subject matter of the agency relationship, and the agency is irrevocable.

An agency coupled with an interest will be created by a written agreement which provides that a(n) A. Borrower shall pledge securities to a lender which authorizes the lender to sell the securities and apply the proceeds to the loan in the event of default. B. Employee is hired for a period of 2 years at $40,000 per annum plus 2% of net sales. C. Broker is to receive a 5% sales commission out of the proceeds of the sale of a parcel of land. D. Attorney is to receive 25% of a plaintiff's recovery for personal injuries.

C If you answered B, it is wrong. Although an excess of net long-term capital gain over net short-term capital loss may be subject to a reduced maximum tax rate, the excess is neither a tax preference nor an adjustment in computing the alternative minimum tax. On the other hand, state income tax is not deductible for purposes of computing an individual's alternative minimum tax.

An individual's alternative minimum tax adjustments include Net long-term capital gain in excess of net short-term capital loss State income tax A. Yes Yes B. Yes No C. No Yes D. No No

D For a condemnation of real property held for productive use in a trade or business or for investment, the replacement period ends three years after the close of the taxable year in which the gain is first realized. Since the gain was realized in 2019, the replacement period ends December 31, 2022.

An office building owned by Elmer Bass was condemned by the state on January 2, 2018. Bass received the condemnation award on March 1, 2019. In order to qualify for nonrecognition of gain on this involuntary conversion, what is the last date for Bass to acquire qualified replacement property? A. August 1, 2020 B. January 2, 2021 C. March 1, 2022 D. December 31, 2022

A If you answered C, it is wrong. After-acquired commercial tort claims are not covered under the Revised UCC Secured Transactions Article.

Article 9 of the UCC which governs security interests has added some items that now are covered by security interests law. Which of the following is true? A. Security interests in tort claims already assessed by a court of law are covered. B. After-acquired commercial tort claims are covered. C. Both the mentioned security interests and after-acquired commercial tort claims are covered. D. Neither the mentioned security interests and after-acquired commercial tort claims are covered.

C Because A and B are both accurate, so C is the best answer.

Assume that the maximum wage base for FICA is $100,000 and that the tax rate is 6.20% of Social Security and 1.45% for Medicare. Employers and employees share the tax equally, meaning that both pay 7.65%. Which of the following is true for Joe, a self-employed person? A. Joe must pay 15.3% (7.65% in his role as employer and 7.65% in his role as employee) under the Self-Employment Contributions Act of 1954. B. In calculating his "net earnings from self-employment" that will be subject to the tax, Joe may subtract 7.65% of his gross earnings to account for the fact that employees do not get taxed on their employers' contribution to the second half of FICA, so self-employed persons should not be taxed on that half of their contribution either. C. A and B. D. None of the above.

C At January 1, 2019, Paul owned a 25% interest in Associates partnership and partnership's liabilities were $150,000, putting the value of Paul's interest at $37,500. During the year, a new partner was admitted and Paul's interest was reduced to 20%. The partnership's liabilities also were reduced, decreasing to $100,000. Paul's 20% interest puts his basis in the partnership interest on December 31, 2019 at $20,000. Thus, the basis of Paul's partnership interest at December 31, 2019, compared to the basis of his interest at January 1, 2019, decreased by $17,500.

At the beginning of 2019, Paul owned a 25% interest in Associates partnership. During the year, a new partner was admitted and Paul's interest was reduced to 20%. The partnership liabilities at January 1, 2019, were $150,000, but decreased to $100,000 at December 31, 2019. Paul's and the other partners' capital accounts are in proportion to their respective interests. Disregarding any income, loss or drawings for 2019, the basis of Paul's partnership interest at December 31, 2019, compared to the basis of his interest at January 1, 2019 was A. Decreased by $37,500. B. Increased by $20,000. C. Decreased by $17,500. D. Decreased by $5,000.

D Aviary's basis in the building is $420,000 ($500,000 cost − $80,000 depreciation). Aviary's gain on the sale of the building is $180,000 ($600,000 amount realized − $420,000 basis). On the installment basis, the $180,000 gain is multiplied by 20% (cash received this year of $120,000/$600,000 contract price). Thus, the gain that is recognized is $36,000 ($180,000 × 20%).

Aviary Corp., a sole proprietorship, sold a building for $600,000. Aviary received a down payment of $120,000 as well as annual principal payments of $120,000 for each of the subsequent four years. Aviary purchased the building for $500,000 and claimed depreciation of $80,000. What amount of gain should Aviary report in the year of sale using the installment method? A. $180,000 B. $120,000 C. $54,000 D. $36,000

B A shareholder's basis for stock of an S corporation is increased by the pass-through of all income items (including tax-exempt income) and is decreased by distributions that are excluded from the shareholder's gross income. Here, Lazur's beginning basis of $12,000 is increased by his 50% share of Beck's ordinary business income ($40,500) and tax-exempt income ($5,000) and is decreased by the $51,000 cash distribution excluded from his gross income, resulting in a stock basis of $6,500.

Beck Corp. has been a calendar-year S corporation since its inception on January 2, 2013. On January 1, 2019, Lazur and Lyle each owned 50% of the Beck stock, in which their respective tax bases were $12,000 and $9,000. For the year ended December 31, 2019, Beck had $81,000 in ordinary business income and $10,000 in taxexempt income. Beck made a $51,000 cash distribution to each shareholder on December 31, 2019. What was Lazur's tax basis in Beck after the distribution? A. $ 1,500 B. $ 6,500 C. $52,500 D. $57,500

D Alimony recapture may occur if alimony payments sharply decline in the second and third years that payments are made. The payor must report the recaptured alimony as gross income in the third year, and the payee is allowed a deduction for the same amount. Recapture for the second year (2018) occurs to the extent that the alimony paid in the second year ($20,000) exceeds the alimony paid in the third year ($0) by more than $15,000 [i.e., $20,000 − ($0 + $15,000) = $5,000 of recapture]. Recapture for the first year (2017) occurs to the extent that the alimony paid in the first year ($50,000) exceeds the average alimony paid in the second and third years by more than $15,000. For this purpose, the alimony paid in the second year ($20,000) must be reduced by the amount of recapture for that year ($5,000). First year (2017) payment $50,000 Second year (2018) payment ($20,000 − $5,000) $15,000 Third year (2019) payment + 0 Total $15,000 ÷ 2 (7,500) (15,000) Recapture for first year (2017) $ 27,500 Thus, the total recapture to be included in Bob's gross income for 2019 is $5,000 + $27,500 = $32,500.

Bob and Sue Stewart were divorced in 2017. Under the terms of their divorce decree, Bob paid alimony to Sue at the rate of $50,000 in 2017, $20,000 in 2018, and nothing in 2019. What amount of alimony recapture must be included in Bob's gross income for 2019? A. $0 B. $23,283 C. $30,000 D. $32,500

D This answer is correct. The requirement is to determine the amount of ordinary business income that Boles Corporation should report on its Form 1120S, US Income Tax Return for an S corporation, Schedule K. As a pass-through entity, an S corporation's items must be divided into (1) nonseparately stated income or loss from trade or business activities, and (2) items of income, loss, deduction, and credit, the separate treatment of which could affect the tax liability of any shareholder. Boles' $50,000 of gross receipts, $2,000 of supplies expense, and $1,500 of utilities expense are all ordinary income and deduction items and are netted in arriving at Boles' nonseparately stated business income of $46,500. In contrast, the $5,000 of dividend income from investments must be separately stated and passed through to shareholders in order to preserve its characteristic as an item of portfolio income.

Boles Corp., an accrual-basis, calendar-year S corporation, has been an S corporation since its inception and is not subject to the uniform capitalization rules. In the current year, Boles recorded the following: Gross receipts $50,000 Dividend income from investments 5,000 Supplies expense 2,000 Utilities expense 1,500 What amount of ordinary business income should Boles report on its current year Form 1120S, U.S. Income Tax Return for an S Corporation, Schedule K? A. $53,500 B. $53,000 C. $48,000 D. $46,500

B This answer is correct. The Statute of Frauds requires that a contract for the sale of goods for $500 or more be in writing in order to be enforceable. In this situation, since the agreed upon price was less than $500, the oral agreement is enforceable and Bond will probably win.

Bond and Spear orally agreed that Bond would buy a car from Spear for $475. Bond paid Spear a $100 deposit. The next day, Spear received an offer of $575, the car's fair market value. Spear immediately notified Bond that Spear would not sell the car to Bond and returned Bond's $100. If Bond sues Spear and Spear defends on the basis of the Statute of Frauds, Bond will probably A. Lose, because the agreement was for less than the fair market value of the car. B. Win, because the agreement was for less than $500. C. Lose, because the agreement was not in writing and signed by Spear. D. Win, because Bond paid a deposit.

D This answer is correct because the statement is false. Ambrose's act of repossessing the car constituted the tort of conversion. An agent or employee is always liable for his own torts, even if committed in the course of discharging his duties.

Brian purchased an automobile from Robinson Auto Sales under a written contract by which Robinson obtained a security interest to secure payment of the purchase price. Robinson reserved the right to repossess the automobile if Brian failed to make any of the required ten payments. Ambrose, an employee of Robinson, was instructed to repossess the automobile on the ground that Brian had defaulted in making the third payment. Ambrose took possession of the automobile and delivered it to Robinson. It was then discovered that Brian was not in default. Which of the following is incorrect? A. Brian has the right to regain possession of the automobile and to collect damages. B. Brian may sue and collect from either Robinson or Ambrose. C. If Ambrose must pay in damages, he will be entitled to indemnification from Robinson. D. Ambrose is not liable for the wrongful repossession of the automobile since he was obeying the direct order of Robinson.

D CPA has already had a full chance to defend himself or herself against serious charges, but has been found guilty by judge or jury or pled guilty (as is the case with this jury finding of guilt in a securities fraud case).

CPA Randall has had a run-in with the law. The AICPA may expulse Randall without a hearing under which of the following circumstances? A. Randall has pled guilty to bank robbery. B. A jury has convicted Randall of securities fraud. C. Randall has been found guilty by a judge following a trial of willfully failing to file a tax return. D. All of the above.

B Most courts do not allow professionals such as doctors, lawyers, and accountants to avoid liability for their malpractice via such disclaimers. Courts usually hold that such disclaimers violate public policy and are, therefore, unenforceable.

CPA Talmac's engagement letter with his tax client contained a provision that the client probably did not notice when he signed the engagement letter. It absolved Talmac of any liability should s/he breach the contract with the client. This proved a fortuitous provision for Talmac, who did breach the contract by providing substantially defective tax advice that cost the client more than $10,000 in penalties and interest. Which of the following is true? A. The liability disclaimer will protect Talmac from liability. B. The liability disclaimer will probably be ignored by a court. C. A and B. D. None of the above.

A When the shares are bequeathed to Boone, his basis in the shares is the fair market value at the date of death, which is $100 per share. When the stock splits 2 for 1, Boone then owns 200 shares of stock with a basis of $50 each. When the shares are gifted to Dixon, she takes the basis in the stock that Boone had, or $50. Therefore, Boone's total basis is $5,000 (100 shares × $50 per share).

Carter purchased 100 shares of stock for $50 per share. Ten years later, Carter died on February 1 and bequeathed the 100 shares of stock to a relative, Boone, when the stock had a market price of $100 per share. One year later, on April 1, the stock split 2 for 1. Boone gave 100 shares of the stock to another of Carter's relatives, Dixon, on June 1 that same year, when the market value of the stock was $150 per share. What was Dixon's basis in the 100 shares of stock when acquired on June 1? A. $5,000 B. $5,100 C. $10,000 D. $15,000

B The Blairs' qualifying medical expenses include the $1,550 of medical insurance premiums, $450 of prescribed medicines, $1,000 of unreimbursed doctor's fees, and $150 of transportation related to medical care. These expenses, which total $3,150, are deductible to the extent they exceed 10% of adjusted gross income, and result in a deduction of $150 ($3,150-$3,000). Note that nonprescription medicines, including aspirin and over-the-counter cold capsules, are not deductible. Additionally, the Blairs cannot deduct the emergency room fee they paid for their son because they did not provide more than half of his support and he therefore does not qualify as their dependent.

Charlene and Gene Blair, age 51, are married and filed a joint return for 2019. Their medical-related expenditures for 2019 included the following: Medical insurance premiums $ 1,550 Medicines prescribed by doctors 450 Aspirin and over-the-counter cold capsules 80 Unreimbursed doctor fees 1,000 Transportation to and from doctors 150 Emergency room fee 500 The emergency room fee related to an injury incurred by the Blairs' adult son, Eric, during a visit to their home. The Blairs graciously paid the bill; however, they provided no other support for Eric during the year. For 2019, Eric earned $18,000 as a self-employed house painter. Assuming the Blairs' adjusted gross income was $30,000, what amount of medical expenses can the Blairs deduct as an itemized deduction for 2019? A. $0 B. $150 C. $650 D. $900

A Since 2/3 of the loan proceeds were used to purchase tax-exempt bonds, 2/3 of the bank interest is nondeductible. The remaining 1/3 of the bank interest ($1,200) is related to the purchase of the Arrow debentures and is classified as investment interest deductible to the extent of net investment income ($0). The $3,000 of home mortgage interest is fully deductible as qualified residence interest. The interest on credit card charges is personal interest and is not deductible.

Charles Wolfe purchased the following long-term investments at par during the current year: $20,000 general obligation bonds of Burlington County (wholly tax-exempt) $10,000 debentures of Arrow Corporation Wolfe financed these purchases by obtaining a $30,000 loan from the Union National Bank. For the current year, Wolfe made the following interest payments: Union National Bank $3,600 Interest on home mortgage 3,000 Interest on credit card charges (items purchased for personal use) 500 What amount can Wolfe utilize as interest expense in calculating itemized deductions for the current year? A. $3,000 B. $4,200 C. $5,400 D. $7,100

A Purchase price $2,000,000 Rehabilitation cost 2,500,000 Total $4,500,000 Tax savings from credit ($2,500,000 × 20% = $500,000) The credit is spread evenly over for 5 years, or $100,000 per year. Present Value Computation Current-year credit $100,000 Present value of credit for years 2-5 (100,000 × 3.546 annuity factor) $354,600 Present value of credit $454,600 After-tax cost of credit ($4,500,000 - $454,600) $4,045,400 A 20% credit is allowed for qualifying expenditures made to rehabilitate a certified historic structure. The credit is claimed ratably over five years beginning with the year the building is placed in service.

Chicago Investors, Inc. is interested in preserving a certified historic structure in downtown Chicago in 2019. The building will cost $2,000,000, and the renovations to rehabilitate the building will cost $2,500,000. Assuming a 5% discount rate that has a factor of 3.546, what is the after-tax cost after claiming the Rehabilitation Credit available to Chicago Investors, Inc.? A. $4,045,400 B. $3,600,000 C. $3,931,750 D. $4,500,000

A This answer is correct. Under Internal Revenue Code Section 6695(f) any person who is an income tax return preparer who endorses or otherwise negotiates any check which is issued to another taxpayer shall pay a penalty of $500.

Clark, a professional tax return preparer, prepared and signed a client's 2012 federal income tax return that resulted in a $600 refund. Which one of the following statements is correct with regard to an Internal Revenue Code penalty Clark may be subject to for endorsing and cashing the client's refund check? A. Clark will be subject to the penalty if Clark endorses and cashes the check. B. Clark may endorse and cash the check, without penalty, if Clark is enrolled to practice before the Internal Revenue Service. C. Clark may endorse and cash the check, without penalty, because the check is for less than $1,000. D. Clark may endorse and cash the check, without penalty, if the amount does not exceed Clark's fee for preparation of the return.

C This answer is correct. A prize or award must generally be included in a recipient's gross income. It can be excluded if the prize or award is made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if the recipient was selected without action on his or her part to enter the contest, the recipient is not required to render substantial future services as a condition to receiving the prize or award, and the prize or award is transferred by the payor to a governmental unit or tax-exempt charitable organization.

DAC Foundation awarded Kent $75,000 in recognition of lifelong literary achievement. Kent was not required to render future services as a condition to receive the $75,000. What condition(s) must have been met for the award to be excluded from Kent's gross income? I. Kent was selected for the award by DAC without any action on Kent's part. II. Pursuant to Kent's designation, DAC paid the amount of the award either to a governmental unit or to a charitable organization. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

C This answer is correct. Although taxpayers may generally choose to use either the cash or the accrual method, the cash method cannot generally be used if inventories are necessary to clearly reflect income, and cannot generally be used by C corporations. Taxpayers permitted to use the cash method include a qualified personal service corporation, and an entity (other than a tax shelter) if for every year it has average gross receipts of $25 million or less for any prior three-year period and does not have inventories. Here, Dart does not qualify for the exceptions that would permit it to use the cash method since it is not a personal service corporation, and Dart has average revenues in excess of $30 million per year. Dart must use the accrual method of accounting.

Dart, a C corporation, distributes software over the Internet and has had average revenues in excess of $30 million dollars per year for the past three years. To purchase software, customers key-in their credit card number to a secure Web site and receive a password that allows the customer to immediately download the software. As a result, Dart doesn't record accounts receivable or inventory on its books. Which of the following statements is correct? A. Dart may use either the cash or accrual method of accounting as long as Dart elects a calendar year-end. B. Dart may utilize any method of accounting Dart chooses as long as Dart consistently applies the method it chooses. C. Dart must use the accrual method of accounting. D. Dart may utilize the cash basis method of accounting until it incurs an additional $10 million to develop additional software.

B This answer is correct. The cost of group-term life insurance provided by an employer must be included in an employee's income to the extent of the cost of life insurance coverage in excess of $50,000. The excess coverage is $90,000 − $50,000 = $40,000. At a cost of $1 per thousand, the amount taxable to Hetnar is $1 × 40 = $40.

David Hetnar is covered by a $90,000 group-term life insurance policy of which his wife is the beneficiary. Hetnar's employer pays the entire cost of the policy, for which the uniform annual premium is $1 per $1,000 of coverage. How much of this premium is taxable to Hetnar? A. $0 B. $40 C. $50 D. $90

B This answer is correct because Jardine does have the right to proceed immediately against the surety for the full amount of the loan without needing to first seek remedies against the principal debtor, Dent, or the collateral.

Dent Corporation received a loan from Jardine Finance Company. As part of the signed written agreement, Jardine required that one of the members of the board of directors of Dent Corporation act as a surety for the entire loan. The loan agreement also called for some of Dent's real estate to be used as collateral for 50% of the loan. Which of the following is correct? A. When the loan is due, Jardine must first seek collection of the loan from Dent before resorting to the surety or the collateral. B. Jardine may choose to proceed against the surety for the entire loan when the loan is due. C. When the loan is due, Jardine needs to exhaust the collateral before resorting to the surety or the debtor. D. Jardine may only resort to the collateral if neither the surety nor the debtor can repay the loan in full.

D This answer is correct. Dr. Berger's (a cash-basis taxpayer) income consists of the $200,000 received from patients and the $30,000 received from third-party reimbursers during 2019. His 2019 deductions include the $20,000 of salaries and $24,000 of other expenses paid in 2019. The year-end bonuses will be deductible for 2020, the year in which they were paid.

Dr. Berger, a physician, reports on the cash basis. The following items pertain to Dr. Berger's medical practice in 2019: Cash received from patients in 2019 $200,000 Cash received in 2019 from third-party reimbursers for services provided by Dr. Berger in 2018 30,000 Salaries paid to employees in 2019 20,000 Year-end 2019 bonuses paid to employees in 2020 1,000 Other expenses paid in 2019 24,000 What is Dr. Berger's net income for 2019 from his medical practice? A. $155,000 B. $156,000 C. $185,000 D. $186,000

D Since the interest income resulting from the bond transferred to the trust will be accumulated and distributed to the child in the future upon reaching the age of twenty-one, the gift (represented by the $8,710 present value of the interest to be received by the child at age twenty-one) is a gift of a future interest and is not eligible to be offset by an annual exclusion.

During 2019, Blake transferred a corporate bond with a face amount and fair market value of $20,000 to a trust for the benefit of her 16 year old child. Annual interest on this bond is $2,000, which is to be accumulated in the trust and distributed to the child on reaching the age of 21. The bond is then to be distributed to the donor or her successor-in-interest in liquidation of the trust. Present value of the total interest to be received by the child is $8,710. The amount of the gift that is excludable from taxable gifts is A. $20,000. B. $14,000. C. $ 8,710. D. $0.

B George's basic standard deduction is limited to the greater of $1,100, or George's earned income of $1,700, plus $350. Thus, George's taxable income would be computed as follows: Dividends $ 3,700 Wages 1,700 AGI $ 5,400 Std. deduction (2,050) Taxable income $ 3,350

During 2019, George (age nine and is a dependent of his parents) received dividend income of $3,700, and had wages from an after-school job of $1,700. What is the amount that will be reported as George's taxable income for 2019? A. $250 B. $3,350 C. $3,450 D. $5,400

B The $360 vehicle tax based on value is deductible as a personal property tax. The real property tax of $2,700 must be apportioned between the Bronsons and the buyer for tax purposes according to the number of days in the real property tax year that each owns the property even though they did not actually make an apportionment. Taxes are apportioned to the seller up to, but not including, the date of the sale, and apportioned to the buyer beginning with the date of sale. Since the house was sold June 30, the Bronson's deduction for real estate taxes would be $2,700 × 180/365 = $1,332. The buyer would deduct the remaining $1,368.

During 2019, Jack and Mary Bronson paid the following taxes: Taxes on residence (for period January 1 to December 31, 2019) $2,700 State motor vehicle tax on value of the car 360 The Bronsons sold their house on June 30, 2019, under an agreement in which the real estate taxes were not prorated between the buyer and sellers. What amount should the Bronsons deduct as taxes in calculating itemized deductions for 2019? A. $1,350 B. $1,692 C. $2,160 D. $3,060

D This answer is correct. The medical expenses incurred by a taxpayer for himself, spouse, or a dependent are deductible when paid or charged to a credit card. The $5,000 of medical expenses for his dependent daughter is deductible by Jay for 2019 when charged on Jay's credit card. It doesn't matter that payment to the credit card issuer had not been made when Jay filed his return. Expenses paid for the medical care of a decedent by the decedent's spouse are deductible as medical expenses in the year they are paid, whether the expenses are paid before or after the decedent's death. Thus, the $3,200 of medical expenses for his deceased spouse is deductible by Jay when paid in 2019, even though his spouse died in 2018.

During 2019, Jay charged $5,000 on his credit card for his dependent daughter's medical expenses. Payment to the credit card company had not been made by the time Jay filed his income tax return for 2019. However, in 2019, Jay paid a physician $3,200 for the medical expenses of his wife, who died in 2018. Disregarding the adjusted gross income percentage threshold, what amount could Jay claim in his 2019 income tax return for medical expenses? A. $0 B. $3,200 C. $5,000 D. $8,200

D Deductible medical expenses include those incurred by a taxpayer, taxpayer's spouse, dependents of the taxpayer, or any person for whom the taxpayer could claim a dependency exemption except that the person had gross income of $4,200 (2019) or more, or filed a joint return. Thus, the Bensons may deduct medical expenses incurred for themselves, for John (i.e., qualifies for exception of no dependency exemption only because his gross income is $4,200 or more), and for Nancy (i.e., a dependent of the Bensons).

During 2019, Mr. and Mrs. Benson provided substantially all the support, in their own home, for their son John, age 26, and for Mrs. Benson's cousin Nancy, age 17. John had $6,000 of income for 2019, and Nancy's income was $2,500. The Bensons paid the following medical expenses during the year: Medicines and drugs For themselves $400 For John 500 For Nancy 100 Doctors For themselves 600 For John 900 For Nancy 200 What is the total amount of medical expenses (before application of any limitation rules), that would enter into the calculation of itemized deductions on the Bensons' 2019 tax return? A. $1,000 B. $1,300 C. $2,400 D. $2,700

A Vincent Tally is not entitled to a charitable deduction for the current year because he did not give up his entire interest in the book collection. By reserving the right to use and possess the book collection for his lifetime, Vincent Tally has not made a completed gift. Therefore, no deduction is available. The contribution will be deductible when his entire interest in the books is transferred to the art museum.

During 2019, Vincent Tally gave to the municipal art museum title to his private collection of rare books that was assessed and valued at $60,000. However, he reserved the right to the collection's use and possession during his lifetime. For the current year, he reported an adjusted gross income of $100,000. Assuming that this was his only contribution during the year, and that there were no carryovers from prior years, what amount can he deduct as contributions for 2019? A. $0 B. $30,000 C. $50,000 D. $60,000

D Sec. 179 permits a taxpayer to elect to treat up to $1,020,000 (for 2019) of the cost of qualifying depreciable personal property as an expense rather than as a capital expenditure. However, the $1,020,000 maximum is reduced dollar for dollar by the cost of qualifying property placed in service during the taxable year that exceeds $2,550,000.

During August 2019, Roe Corp. purchased and placed in service a machine to be used in its manufacturing operations. This machine cost $1,600,000. What portion of the cost may Roe elect to treat as a Sec. 179 expense deduction rather than as a capital expenditure? Assume that bonus depreciation is not elected. A. $100,000 B. $500,000 C. $600,000 D. $1,020,000

B This answer is correct. In fiduciary accounting, all receipts and disbursements are classified as either income or corpus (principal). For example, interest on state bonds may constitute accounting income even though not included in gross income for tax purposes. Other items, for example capital gain, would be included in gross income for tax purposes but may be classified as corpus (principal) for fiduciary accounting purposes. Any items allocated to corpus (principal) are not included in the computation of a trust's accounting income. Here, the trust's accounting income includes the $10,000 of dividends, $12,000 of interest from corporate bonds, and $4,000 of tax-exempt interest from state bonds, but excludes the capital gain and trustee fee which are allocated to corpus (principal).

During the current year, a trust reports the following information: Dividends $10,000 Interest from corporate bonds 12,000 Tax-exempt interest from state bonds 4,000 Capital gain (allocated to corpus) 2,000 Trustee fee (allocated to corpus) 6,000 What is the trust's accounting income? A. $22,000 B. $26,000 C. $28,000 D. $34,000

B Since a recapitalization is a reorganization, a realized gain will be recognized to the extent that consideration other than stock or securities is received, including the FMV of an excess principal amount of securities received over the principal amount of securities surrendered. Since no securities were surrendered, the entire $10,500 FMV of the securities received by Roberts is treated as boot. However, in this case, Roberts recognized gain is limited to her realized gain ($91,000 + $10,500) − $95,000 = $6,500.

During the current year, in connection with a recapitalization of Oakbrook Corporation, Mary Roberts exchanged 500 shares that cost her $95,000 for 1,000 shares of new stock worth $91,000 and bonds in the principal amount of $10,000 with a fair market value of $10,500. What is the amount of Roberts' recognized gain for the current year? A. $0 B. $ 6,500 C. $10,000 D. $10,500

C Actions that bar a general discharge in bankruptcy include removing or destroying property within twelve months prior to filing the petition with intent to hinder, delay, or defraud creditors. Also included is making a false entry in a document related to the bankrupt's affairs.

Eckson was granted an order for relief after having filed a petition in bankruptcy. Which of the following actions would bar a general discharge in bankruptcy? I. Ten months before the bankruptcy proceedings, Eckson had obtained credit from Cardinal Corporation by using false information on the credit application. II. Six months before he filed the petition, Eckson removed assets from his land with the intent to defraud creditors. III. During the bankruptcy proceedings, Eckson made a false entry on some records pertaining to his assets. A. I only. B. I and II only. C. II and III only. D. I, II, and III.

A For a decedent dying during 2019, a federal estate tax return (Form 706) must be filed if the decedent's gross estate exceeds $11,400,000. If a decedent made taxable lifetime gifts such that the decedent's applicable transfer tax credit was used to offset the gift tax, the ($11,400,000) exemption amount must be reduced by the amount of taxable lifetime gifts to determine whether a return is required to be filed. Since Lew made no lifetime gifts and the value of Lew's gross estate was only $10,780,000, no federal estate tax return is required to be filed for Lew's estate. In Eng's case, the $11,400,000 exemption is reduced by Eng's $400,000 of taxable lifetime gifts to $11,000,000. However, since Eng's gross estate totaled only $3,900,000, no federal estate tax return is required to be filed for Eng's estate.

Eng and Lew, both U.S. citizens, died in 2019. Eng made taxable lifetime gifts of $400,000 that are not included in Eng's gross estate. Lew made no lifetime gifts. At the dates of death, Eng's gross estate was $3,900,000, and Lew's gross estate was $10,780,000. A federal estate tax return must be filed for Eng Lew A. No No B. No Yes C. Yes No D. Yes Yes

D This answer is correct because a novation is a three-party agreement between the contracting parties and a third party, whereby one of the contracting parties is discharged from his/her duty and the third party is substituted in the discharged party's place. In this case, all three parties agree to discharge the old contracts between Fiore and Lutz, and Lutz and Bing, by the creation of a new contract between Fiore and Bing. The new contract is a novation.

Fiore owed Lutz $5,000. As the result of an unrelated transaction, Lutz owed Bing that same amount. The three parties signed an agreement that Fiore would pay Bing instead of Lutz and Lutz would be discharged from all liability. The agreement among the parties is A. Unenforceable for lack of consideration. B. Voidable at Bing's option. C. An executed accord and satisfaction. D. A novation.

D If an executor does not elect the alternate valuation date, all property in which the decedent possessed an ownership interest at time of death is included in the decedent's gross estate at its fair market value at date of death. If property was held in joint tenancy and was acquired by purchase by other than spouses, the property's total fair market value will be included in the decedent's gross estate except to the extent that the surviving tenant can prove that he/she contributed toward the purchase. Since Wald purchased the land with his own funds, the land's total fair market value ($3,800,000) must be included in Wald's gross estate together with Wald's personal effects and jewelry ($1,750,000), resulting in a gross estate of $5,550,000.

Following are the fair market values of Wald's assets at the date of death: Personal effects and jewelry $1,750,000 Land bought by Wald with Wald's funds five years prior to death and held with Wald's sister as joint tenants with right of survivorship 3,800,000 The executor of Wald's estate did not elect the alternate valuation date. The amount includible as Wald's gross estate in the federal estate tax return is A. $1,750,000 B. $3,800,000 C. $5,000,000 D. $5,550,000

A Correct! For purposes of computing an individual's AMT, no deduction is allowed for personal, state, and local taxes, and home mortgage interest if the loan proceeds were not used to buy, build, or substantially improve the home. Additionally, unreimbursed medical expenses are allowed only to the extent in excess of 10% of adjusted gross income. Here, Robert's allowable itemized deductions for AMT purposes consist of medical expenses of $12,000 − (10% × $100,000) = $2,000, qualified mortgage interest of $10,000, and charitable contributions of $5,000, resulting in a total of $17,000.

For 2019, Robert had adjusted gross income of $100,000 and potential itemized deductions as follows: Medical expenses (before percentage limitations) $12,000 State income taxes 4,000 Real estate taxes 3,500 Qualified housing and residence mortgage interest 10,000 Home equity mortgage interest (used to consolidate personal debts) 4,500 Charitable contributions (cash) 5,000 What are Robert's itemized deductions that are allowable for alternative minimum tax purposes? A. $17,000 B. $19,500 C. $21,500 D. $25,500

C The generation-skipping transfer tax is imposed as a separate tax in addition to the federal gift and estate taxes, and is designed to prevent an individual from escaping an entire generation of gift and estate taxes by transferring property to a person that is two or more generations below that of the transferor. The tax is imposed at the highest tax rate (40%) under the transfer tax rate schedule.

For 2019, the generation-skipping transfer tax is imposed A. Instead of the gift tax. B. Instead of the estate tax. C. At the highest tax rate under the transfer tax rate schedule. D. When an individual makes a gift to a grandparent.

D Book income must be adjusted for the tax-exempt interest (net of related expenses) and the provision for federal income tax: Book income $1,200,000 Municipal bond interest (40,000) Nondeductible interest expense (to produce tax-exempt interest income) 8,000 Provision for federal income tax 524,000 Taxable income $1,692,000 The damages received for patent infringement that were included in book income are similarly included in taxable income, so no adjustment is necessary.

For the current year, Ajax Corporation had net income per books of $1,200,000. Included in the determination of net income were the following items: Interest income on municipal bonds $ 40,000 Damages received from settlement of patent infringement lawsuit 200,000 Interest paid on loan to purchase municipal bonds 8,000 Provision for federal income tax 524,000 What should Ajax report as its taxable income for the current year? A. $1,200,000 B. $1,524,000 C. $1,492,000 D. $1,692,000

This answer is correct. The requirement is to determine the amount of foreign tax credit that may be claimed by Bell Corporation. The allowable credit for foreign income taxes is subject to an overall limit of Foreign TI/Worldwide TI × (U.S. tax) Thus, the $125,000 of foreign income taxes paid are available as a credit for the current year to the extent of ($300,000/$675,000) × ($229,500) = $102,000

For the current year, Bell Corporation had worldwide taxable income of $675,000 and a tentative United States income tax of $229,500. Bell's taxable income from business operations in Country A was $300,000, and foreign income taxes paid were $125,000 stated in United States dollars. How much should Bell claim as a credit for foreign income taxes on its United States income tax return for the current year? A. $0 B. $ 42,500 C. $102,000 D. $125,000

D This answer is correct. The requirement is to compute Shady's taxable income given book income of $2,000,000 and items included in the computation of book income. Book income must be adjusted for the tax-exempt interest (net of related expenses) and the provision for federal income tax: Book income $2,000,000 Municipal bond interest (60,000) Nondeductible interest expense (to produce tax-exempt interest income) 22,000 Provision for federal income tax 796,000 ______________________________________________________________________ Taxable income $2,758,000 The damages received for patent infringement that were included in book income are similarly included in taxable income, so no adjustment is necessary.

For the current year, Shady Corporation had net income per books of $2,000,000. Included in the determination of net income were the following items: Interest income on municipal bonds $60,000 Damages received from settlement of patent infringement lawsuit 125,000 Interest paid on loan to purchase municipal bonds 22,000 Provision for federal income tax 796,000 What should Shady report as its taxable income for the current year? A. $2,633,000 B. $2,671,000 C. $2,736,000 D. $2,758,000

D A corporation's net capital loss cannot be offset against ordinary income. Instead, a net capital loss is generally carried back three years and forward five years as a STCL to offset capital gains in those years.

For the year ended December 31, 2019, Sol Corp. had an operating income of $20,000. In addition, Sol had capital gains and losses resulting in a net short-term capital gain of $2,000 and a net long-term capital loss of $7,000. How much of the excess of net long-term capital loss over net short-term capital gain could Sol offset against ordinary income for 2019? A. $5,000 B. $3,000 C. $1,500 D. $0

A Incorrect. Net operating losses (NOL) are defined as an excess of deduction over gross income for a particular tax year. The NOL for one year may be carried forward to another tax year to lower a corporation's tax liability for that year. The NOL may be carried forward indefinitely. Hence, the corporation would have $200,000 of the net operating loss available for the year ended December 31, 2020. Note that NOLs incurred before 2019 are still carried forward for only 20 years.

For the year ended December 31, 2019, Taylor Corp. (not an eligible small business) had a net operating loss of $200,000. Taxable income for the earlier years of corporate existence, computed without reference to the net operating loss, was as follows: Taxable Income 2014 $ 5,000 2015 $10,000 2016 $20,000 2017 $30,000 2018 $40,000 What amount of net operating loss will be available to Taylor for the year ended December 31, 2020? A. $200,000 B. $130,000 C. $110,000 D. $100,000

B This answer is correct. Whenever the CPA finds evidence of a matter that would be of interest to management, he or she should inform management.

Fowler, CPA, was performing a review of the financial statements of Tut Corp., a nonpublic company, when he discovered evidence that the company's cashier may be embezzling funds. However, since he was not performing an audit of the company, Fowler did not follow up on the matter, nor did he inform management of his suspicions. Which of the following is accurate about Fowler's liability? A. Fowler will not be held liable to Tut Corp. because management of Tut Corp. was not relying on the financial statements to make investment decisions. B. Fowler will be held liable to Tut Corp. because he did not follow up on the matter nor did he inform management of the matter. C. Fowler will not be held liable to Tut Corp. because management of Tut Corp. is also negligent for not having adequate controls. D. Fowler will not be held liable to Tut Corp. because management of Tut Corp. should have known about the embezzlement.

A Correct! Although there is a consumer to consumer sale of a PMSI in consumer goods, in this case, in addition to the automatic perfection, the creditor filed a financing statement. Even without actual knowledge, the public filing puts Lutz on notice of Dix's interest.

Foxx purchased a stereo for personal use from Dix Audio, a retail seller of appliances. Foxx paid 30% of the $600 sales price and agreed to pay the balance in 12 equal principal payments plus interest. Foxx executed a security agreement giving Dix a security interest in the stereo. Dix properly filed a financing statement immediately. After making six payments, Foxx defaulted. If, after making the third installment payment, Foxx sold the stereo to Lutz for personal use, who would have a superior interest in the stereo,assuming Lutz lacked knowledge of Dix's security interest? A. Dix, since it filed a financing statement B. Dix, since more than 30% of the purchase price had been paid C. Lutz, since title passed from Foxx to Lutz D. Lutz, since Lutz purchased without knowledge of Dix's security interest and for personal use

A Beginning in 2018, theft losses are not deductible for individuals because they are not attributable to a federally declared disaster.

Frank Lyon was held up and robbed of $800 cash in June 2019. One month later, Frank had $2,000 cash stolen from him by his housekeeper. Frank's adjusted gross income for 2019 was $10,000. How much was deductible by Frank for theft losses in 2019? A. $0 B. $1,600 C. $1,700 D. $1,800

C When property is held in joint tenancy by other than spouses, the property's fair market value is included in a decedent's estate to the extent of the percentage that the decedent contributed toward the purchase. Since Ethel furnished 80% of the land's purchase price, 80% of its $300,000 fair market value, or $240,000 is included in Ethel's estate. Thus, Fred's basis is $240,000 plus the $20,000 of purchase price that he furnished, a total of $260,000.

Fred and Ethel (brother and sister), residents of a noncommunity property state, own unimproved land that they hold in joint tenancy with rights of survivorship. The land cost $100,000 of which Ethel paid $80,000 and Fred paid $20,000. Ethel died during 2019 when the land was worth $300,000, and $240,000 was included in Ethel's gross estate. What is Fred's basis for the property after Ethel's death? A. $140,000 B. $240,000 C. $260,000 D. $300,000

D Correct! The Payneses' return can include medical expenses that the Paynes pay for themselves, as well as the medical expenses they pay for an individual qualifying as a dependent, even though a dependency exemption cannot be claimed because the individual has gross income of $4,200 (2019) or more or files a joint return. An individual qualifies as a taxpayer's dependent for purposes of the medical deduction if the individual is of a specified relationship or a member of the taxpayer's household, is a U.S. citizen or resident, and the taxpayer provides more than half of the individual's support. Thus, the Paynes can include the $700 of medical expenses paid for Gail's mother, as well as the $500 of medical expenses paid for their son, who does not qualify as a dependency exemption only because he has gross income of $4,200 or more.

Gail and Jeff Payne are married and filed a joint return for 2019. During 2019 they paid the following doctors' bills for Gail's mother, who received over half of her support from Gail and Jeff, but who does not live in the Payne household, and who earned $3,500 in 2019 for babysitting. $700 Their unmarried 26-year old son, who earned $4,800 in 2019, but was fully supported by his parents. He is not a full-time student. 500 Disregarding the adjusted gross income percentage test, how much of these doctors' bills may be included on the Payneses' joint return in 2019 as qualifying medical expenses? A. $0 B. $500 C. $700 D. $1,200

D This answer is correct. In computing the gift tax, there is an unlimited marital deduction that applies to gifts to a taxpayer's spouse after first subtracting the annual exclusion. Thus, the $1 million gift to the spouse is fully offset by an annual exclusion and marital deduction and does not result in a taxable gift.

George and Suzanne have been married for 40 years. Suzanne inherited $1,000,000 from her mother. Assume that the annual gift tax exclusion is $15,000. What amount of the $1,000,000 can Suzanne give to George without incurring a gift tax liability? A. $ 15,000 B. $ 30,000 C. $ 500,000 D. $1,000,000

D Although the $6,000 loss that was deducted in arriving at the partnership's net income would also be deductible for tax purposes, it must be separately passed through to partners because it is a Sec. 1231 loss. Thus, the $6,000 loss must be added back to the $94,000 of partnership net income and results in partnership ordinary income of $100,000. Peel's share is $100,000 × 50% = $50,000.

Gladys Peel owns a 50% interest in the capital and profits of the partnership of Peel and Poe. On July 1, 2019, Peel bought land the partnership had used in its business for its fair market value of $10,000. The partnership had acquired the land five years ago for $16,000. For the year ended December 31, 2019, the partnership's net income was $94,000 after recording the $6,000 loss on the sale of land. Peel's distributive share of ordinary income from the partnership for 2019 was A. $47,000. B. $48,500. C. $49,000. D. $50,000.

B This answer is correct. An ultra vires doctrine applies when a corporation enters a contract outside the scope of its express or implied authority granted by its Articles of Incorporation. Since the state or shareholder has the right to object to an ultra vires act, a competitor could not object. A shareholder can institute a derivative action against directors and officers to recover damages for such acts.

Golden Enterprises, Inc. entered into a contract with Hidalgo Corporation for the sale of its mineral holdings. The transaction proved to be ultra vires. Which of the following parties, for the reason stated, may properly assert the ultra vires doctrine? A. Golden enterprises to avoid performance. B. A shareholder of Golden Enterprises to enjoin the sale. C. Hidalgo Corporation to avoid performance. D. Golden Enterprises to rescind the consummated sale.

C This answer is correct. For 2019, Sec. 179 permits a taxpayer to elect to treat up to $1,020,000 of the cost of qualifying depreciable personal property as an expense rather than as a capital expenditure. However, the $1,020,000 maximum is reduced dollar for dollar by the cost of qualifying property placed in service during the taxable year that exceeds $2,550,000. Here, the maximum amount that can be expensed is [$1,020,000 - ($2,600,000 - $2,550,000)] = $970,000.

In 2019, Roe Corp. purchased and placed in service a used machine to be used in its manufacturing operations. This machine cost $2,600,000. What portion of the cost may Roe elect to treat as an expense rather than as a capital expenditure? A. $ 0 B. $200,000 C. $970,000 D. $1,020,000

B When the contracts an agent is entering into for the principal are required to be in writing, then the agent's authority to do so should also be in writing.

Green entered into an oral agency agreement to purchase real estate on behalf of Smith. Subsequently, Green entered into a written contract to buy land from Davis without disclosing the relationship with Smith. Which of the following is Smith's best legal defense if Smith does not want the land? A. Green failed to disclose Smith's relationship as principal. B. Green failed to get the agency agreement in writing. C. Green's act was a misrepresentation of Green's express authority. D. Green failed to get Smith's consent before entering into the contract with Davis.

D The $2,000 legal fee is considered an expenditure incurred in the production of income. Expenses incurred in the production of income are 2% miscellaneous itemized deductions which are not deductible beginning in 2018.

Hall, a divorced person and custodian of her twelve-year-old child, submitted the following information to the CPA who prepared her 2019 return: The divorce agreement, executed in 2017, provides for Hall to receive $3,000 per month, of which $600 is designated as child support. After the child reaches eighteen, the monthly payments are to be reduced to $2,400 and are to continue until remarriage or death. However, for the year 2019, Hall received a total of only $5,000 from her former husband. Hall paid an attorney $2,000 in 2019 in a suit to collect the alimony owed. The $2,000 legal fee that Hall paid to collect alimony should be treated as A. A deduction in arriving at adjusted gross income. B. An itemized deduction subject to the 2% of adjusted gross income floor. C. An itemized deduction not subject to the 2% of adjusted gross income floor. D. A nondeductible personal expense.

D If the liability is more than the partnership can pay, each partner loses its capital contribution and then the general partner has personal, unlimited liability for the debt.

Hart and Grant formed Hart Limited Partnership. Hart put in a capital contribution of $20,000 and became a general partner. Grant put in a capital contribution of $10,000 and became a limited partner. During the second year of operation, a third party filed a tort action against the partnership and both partners. What is the potential liability of Hart and Grant respectively? A. $20,000 and $0. B. $20,000 and $10,000. C. Unlimited liability and $0. D. Unlimited liability and $10,000.

D This answer is correct. The straight-line method of depreciation over a period of 39 years must be used for regular tax purposes to determine the MACRS depreciation deduction for nonresidential real property placed in service after 1986.

How is the depreciation deduction for nonresidential real property, placed in service in 2019, determined for regular tax purposes using MACRS? A. Straight-line method over 40 years B. Straight-line method over 27.5 years C. 150% declining balance method with a switch to the straight-line method over 39 years D. Straight-line method over 39 years

D This answer is correct. CPA firms that audit more than 100 issuers must have an annual inspection by the PCAOB.

How many public company audits per year does a CPA firm that is registered with the Public Company Accounting Oversight Board (PCAOB) have to perform before it receives an annual inspection from the PCAOB? A. One audit. B. More than 10 audits. C. More than 50 audits. D. More than 100 audits.

B This answer is correct because the shipping term "C&F" (cost and freight) means that the purchase price includes both the cost of the goods and the cost of delivering the goods to the shipper. Under such agreements, the risk of loss and title to the goods pass when the seller places the goods in the appropriate carrier's hands.

If a contract for the sale of goods includes a C&F shipping term and the seller has fulfilled all of its obligations, the A. Title to the goods will pass to the buyer when the goods are received by the buyer at the place of destination. B. Risk of loss will pass to the buyer upon delivery of the goods to the carrier. C. Buyer retains the right to inspect the goods prior to making payment. D. Seller must obtain an insurance policy at its own expense for the buyer's benefit.

C S corporations do not generate any earnings and profits, but may have accumulated earnings and profits from prior years as a C corporation. If accumulated earnings and profits are distributed to shareholders, the distributions will be taxed as dividend income to the shareholders. However, if an S corporation has no accumulated earnings and profits, distributions are generally nontaxable and reduce a shareholder's basis for stock. To the extent distributions exceed stock basis, they result in capital gain.

If an S corporation has no accumulated earnings and profits, the amount distributed to a shareholder A. Must be returned to the S corporation. B. Increases the shareholder's basis for the stock. C. Decreases the shareholder's basis for the stock. D. Has no effect on the shareholder's basis for the stock.

D If an exempt organization is a charitable trust, then unrelated business income is subject to tax only for the amount of such income in excess of $1,000.

If an exempt organization is a charitable trust, then unrelated business income is A. Not subject to tax. B. Taxed at rates applicable to corporations. C. Subject to tax even if such income is less than $1,000. D. Subject to tax only for the amount of such income in excess of $1,000.

D If you answered C, the answer is incorrect. The amount of alternative minimum tax paid by an individual that is attributable to timing preferences and adjustments is allowed as a tax credit (i.e., minimum tax credit) that can be applied against regular tax liability in future years. The minimum tax credit is computed as the excess of the AMT actually paid over the AMT that would have been paid if AMTI included only exclusion preferences and adjustments (e.g., disallowed itemized deductions, excess percentage depletion, tax-exempt private activity bond interest). Since the minimum tax credit can only be used to reduce future regular tax liability, the credit can only reduce regular tax liability to the point at which it equals the taxpayer's tentative minimum tax. In this case, Karen's payment of $20,000 of alternative minimum tax in 2018 generates a minimum tax credit of $20,000 − $9,000 = $11,000, which is carried forward to 2019. Since Karen's 2019 regular tax liability of $50,000 exceeded her tentative minimum tax of $45,000, $5,000 of Karen's minimum tax credit would be used to reduce her 2019 tax liability to $45,000. Therefore, $11,000 − $5,000 = $6,000 of unused minimum tax credit would carry over to 2020.

In 2018, Karen Miller had an alternative minimum tax liability of $20,000. This was the first year that she paid an alternative minimum tax. When she recomputed her 2018 alternative minimum tax using only exclusion preferences and adjustments, her alternative minimum tax was $9,000. For 2019, Karen had a regular tax liability of $50,000 and a tentative minimum tax of $45,000. What is the amount of Karen's unused minimum tax credit from 2019 that will carry over to 2020? A. $0 B. $4,000 C. $5,000 D. $6,000

A The amount of a personal casualty loss that is part of a federally declared disaster area is computed as the lesser of (1) the adjusted basis of the property ($130,000), or (2) the decline in the property's fair market value resulting from the casualty ($130,000 − $0 = $130,000); reduced by any insurance recovery ($120,000), and a $100 floor. Since Frazer had no casualty gains during the year, the net casualty loss is then deductible as an itemized deduction to the extent that it exceeds 10% of adjusted gross income. Fire loss $ 130,000 Insurance proceeds (120,000) $100 floor (100) 10% of $70,000 AGI (7,000) _____________________________________________________________ Casualty loss itemized deduction $ 2,900

In 2019, Joan Frazer's residence was totally destroyed by fire. The area has been declared a Federal Disaster Area. The property had an adjusted basis and a fair market value of $130,000 before the fire. During 2019, Frazer received insurance reimbursement of $120,000 for the destruction of her home. Frazer's 2019 adjusted gross income was $70,000. Frazer had no casualty gains during the year. What amount of the fire loss was Frazer entitled to claim as an itemized deduction on her 2019 tax return? A. $ 2,900 B. $ 8,500 C. $ 8,600 D. $10,000

C If you answered B, the answer is incorrect because the liquidated damages set the amount of the compensatory damages for the type of breach that occurred.

In June, Mullin, a general contractor, contracted with a town to renovate the town square. The town council wanted the project done quickly and the parties placed a clause in the contract that for each day the project extended beyond 90 working days, Mullin would forfeit $100 of the contract price. In August, Mullin took a three-week vacation. The project was completed in October, 120 working days after it was begun. What type of damages may the town recover from Mullin? A) Punitive damages because taking a vacation in the middle of the project was irresponsible. B) Compensatory damages because of the delay in completing the project. C) Liquidated damages because of the clause in the contract. D) No damages because Mullin completed performance.

C This answer is correct because in a common-law action against an accountant, the lack of privity is a viable defense if the plaintiff is a creditor of the client who sues the accountant for negligence. Parties are not considered to have privity of contract with the accountant when the undertaking of the audit was not for their express purpose.

In a common-law action against an accountant, the lack of privity is a viable defense if the plaintiff A. Bases his action upon fraud. B. Is the accountant's client. C. Is a creditor of the client who sues the accountant for negligence. D. Can prove the presence of gross negligence which amounts to a reckless disregard for the truth.

D Basis is determined as follows: Cash $ 5,000 Basis of land 12,000 Mortgage assumed by partnership (10,000) Skinner's share of mortgage (20%) 2,000 Skinner's share of recourse liabilities 4,000 _________________________ $13,000

In return for a 20% partnership interest, Skinner contributed $5,000 cash and land with a $12,000 basis and a $20,000 fair market value to the partnership. The land was subject to a $10,000 mortgage that the partnership assumed. In addition, the partnership had $20,000 in recourse liabilities that would be shared by partners according to their partnership interests. What amount represents Skinner's basis in the partnership interest? A. $27,000 B. $21,000 C. $19,000 D. $13,000

C This answer is correct. A partnership generally is restricted in choosing a tax year in order to prevent the deferral of income to partners that could otherwise occur. Thus, a newly formed partnership is required to adopt the same taxable year as is used by its one or more partners owning a more than 50% interest in profits and capital. This insures that there will be no deferral of reporting of income for more than 50% of the partnership's income.

In the absence of an election to adopt an annual accounting period, the required tax year for a partnership is A. A tax year that results in the greatest aggregate deferral of income. B. A calendar year. C. A tax year of one or more partners with a more than 50% interest in profits and capital. D. A tax year of a principal partner having a 10% or greater interest.

C CORRECT! Ordinary income is the income reported on page 1 of Form 1065 that includes only non-separately stated income. Charitable contributions and long-term capital gain are separately stated. Fees earned $500,000 Salary expense (100,000) Utility expense (5,000) Office supplies (500) _____________________________________________ Ordinary income $394,500

In the current year, a partnership reported the following items: Fees earned $500,000 Salary expense 100,000 Utility expense 5,000 Charitable contributions 8,000 Long-term capital gain 2,000 Office supplies 500 What is the partnership's ordinary income? A. $386,500 B. $388,500 C. $394,500 D. $396,500

B This answer is correct. Clark was a partner for the entire year and is taxed on his distributive 1/3 share ($45,000 × 1/3 = $15,000). Since Aster sold his entire partnership interest to Dexter, the partnership tax year closes with respect to Aster on February 28. As a result, Aster's distributive share is $45,000 × 1/3 × 8/12 = $10,000. Dexter's distributive share is $45,000 × 1/3 × 4/12 = $5,000. Additionally, the partnership tax year closes with respect to a deceased partner as of date of death. Since Brill died on March 31, the distributive share to be included in Brill's 2019 Form 1040 would be $45,000 × 1/3 × 9/12 = $11,250. Since Brill's estate held his partnership interest for the remainder of the year, the estate's distributive share of income is $45,000 × 1/3 × 3/12 = $3,750.

Irving Aster, Dennis Brill, and Robert Clark were partners who shared profits and losses equally. On February 28, 2019, Aster sold his interest to Phil Dexter. On March 31, 2019, Brill died, and his estate held his interest for the remainder of the year. The partnership continued to operate and for the fiscal year ending June 30, 2019, it had a profit of $45,000. Assuming that partnership income was earned on a pro rata monthly basis and that all partners were calendar-year taxpayers, the distributive shares to be included in 2019 gross income should be A. Aster $10,000, Brill $0, Estate of Brill $15,000, Clark $15,000, and Dexter $5,000. B. Aster $10,000, Brill $11,250, Estate of Brill $3,750, Clark $15,000, and Dexter $5,000. C. Aster $0, Brill $11,250, Estate of Brill $3,750, Clark $15,000, and Dexter $15,000. D. Aster $0, Brill $0, Estate of Brill $15,000, Clark $15,000, and Dexter $15,000.

C This answer is correct. Under the Revised Uniform Partnership Act, the partners have joint and several liability for all of the partnership debts. This is true whether the debts are based on contract or tort law.

Kinder, Lau, and Sanders form a partnership under the Revised Uniform Partnership Act (RUPA). Which of the following is not true concerning the partnership itself? A. The partnership is a separate legal entity. B. The partnership may own property in the partnership name. C. The partners have joint but not several liability for business debts. D. The partnership may sue another business in the partnership name.

C Clark was a partner for the entire year and is taxed on his distributive 1/3 share ($45,000 × 1/3 = $15,000). Since Aster sold his entire partnership interest to Dexter, the partnership tax year closes with respect to Aster on February 28. As a result, Aster's distributive share is $45,000 × 1/3 × 8/12 = $10,000. Dexter's distributive share is $45,000 × 1/3 / 4/12 = $5,000. Additionally, a partnership tax year closes with respect to a deceased partner as of date of death. Since Brill died on March 31, the distributive share to be included in Brill's 2019 Form 1040 would be $45,000 × 1/3 × 9/12 = $11,250. Since Brill's estate held his partnership interest for the remainder of the year, the estate's distributive share of income is $45,000 × 1/3 × 3/12 = $3,750.

Irving Aster, Dennis Brill, and Robert Clark were partners who shared profits and losses equally. On February 28, 2019, Aster sold his interest to Phil Dexter. On March 31, 2019, Brill died, and his estate held his interest for the remainder of the year. The partnership continued to operate and for the fiscal year ending June 30, 2019, it had a profit of $45,000. Assuming that partnership income was earned on a pro rata monthly basis and that all partners were calendar-year taxpayers, the distributive shares to be included in 2019 gross income should be A. Aster $10,000, Brill $0, Estate of Brill $15,000, Clark $15,000, and Dexter $5,000. B. Aster $10,000, Brill $11,250, Estate of Brill $3,750, Clark $15,000, and Dexter $5,000. C. Aster $0, Brill $11,250, Estate of Brill $3,750, Clark $15,000, and Dexter $15,000. D. Aster $0, Brill $0, Estate of Brill $15,000, Clark $15,000, and Dexter $15,000.

A Sec. 1244 permits a shareholder to deduct an ordinary loss of up to $50,000 per year ($100,000 if married filing jointly) if qualifying stock is sold, exchanged, or becomes worthless. The qualifying stock must have been issued in exchange for money or other property and must have been issued to the individual or partnership sustaining the loss. Ordinary loss treatment is not available if the shareholder sustaining the loss was not the original holder of the stock. As a result, an individual who acquires stock by purchase, gift, or inheritance from another shareholder is not entitled to ordinary loss treatment. Since Jackson inherited the Bean stock from his parents, Jackson does not qualify for ordinary loss treatment and his $25,000 loss will be recognized as a long-term capital loss.

Jackson, a single individual, inherited Bean Corp. common stock from Jackson's parents. Bean is a qualified small business corporation under Code Sec. 1244. The stock cost Jackson's parents $20,000 and had a fair market value of $25,000 at the parents' date of death. During the year, Bean declared bankruptcy and Jackson was informed that the stock was worthless. What amount may Jackson deduct as an ordinary loss in the current year? A. $0 B. $ 3,000 C. $20,000 D. $25,000

A Correct! Beginning in 2018, moving expenses are not deductible.

James, a calendar-year taxpayer, was employed and resided in Boston. On February 4, 2019, James was permanently transferred to Florida by his employer. James worked full-time for the entire year. In 2019, James incurred and paid the following unreimbursed expenses in relocating: Lodging and travel expenses while moving $1,000 Meals while in route to Florida 300 Cost of insuring household goods and personal effects during move 200 Cost of shipping household pets to new home 100 Costs of moving household furnishings and personal effects 3,000 What amount was deductible as moving expenses on James's 2019 tax return? A. $0 B. $4,500 C. $4,300 D. $4,000

C CORRECT! The QBI deduction is computed separately for each trade or business and is 20% of the qualified business income. The QBI deduction cannot exceed the greater of: 50% of the taxpayer's share of the W-2 wages paid by the business, or 25% of the taxpayer's share of the W-2 wages paid by the business, plus 2.5% of the unadjusted basis of qualified property. The wages/property limitation does not apply to taxpayers with taxable income not exceeding $321,400 (married filing joint) or $160,700 (others). If taxable income exceeds these thresholds, the limitation is phased in over a $100,000 (joint)/$50,000 (others) range. Since modified taxable income is in the phase-in range for the limitation (Column 2 of Table 1), then: The full QBI deduction (determine without any limitation) is $14,400 ($72,000 × 20%). The QBI deduction once the phase-in is completed (Column 3) is $0 since W-2 wages paid is zero and no information is given for the basis of the assets. The full QBI deduction of $14,400 is reduced by: ($14,400−$0)×(($325,000−$321,400)/$100,000)=$14,400 $14,400×3.6%=$518 The QBI deduction is $13,882 ($14,400 − $518). Taxable income is $325,000 − $13,882 = $311,118.

Jamie and Lucas are a married filing jointly couple. Jamie is the sole proprietor of Jamie's Pizza who pays no W-2 wages. Jamie's Schedule C profit is $72,000, and their taxable income before the qualified business income deduction is $325,000. What is Jamie and Lucas's taxable income? A. $0 B. $325,000 C. $311,118 D. $310,600

B This answer is correct. The requirement is to determine which methods of estimated tax payment can be used by Jarovsky Corp. to avoid the penalty for underpayment of federal estimated taxes. Generally, to avoid a penalty for the underpayment of estimated taxes, a corporation's quarterly estimated payments must be at least equal to the least of (1) 100% of the tax shown on the current year's tax return, (2) 100% of the tax that would be due by placing income for specified monthly periods on an annualized basis, or (3) 100% of the tax shown on the corporation's return for the preceding year, provided the preceding year showed a positive tax liability and consisted of 12 months. In this case, Jarovsky cannot base its estimated payments on its preceding year because Jarovsky had a net operating loss for 2019.

Jarovsky Corp., an accrual-basis, calendar-year corporation, had a net operating loss for the tax year ended December 31, 2019. Jarovsky's gross revenues have been under $500,000 since inception. Jarovsky expects to have profits for the tax year ending December 31, 2020. Which method(s) of estimated tax payment can Jarovsky use for its quarterly payments during the 2020 tax year to avoid a penalty for the underpayment of federal estimated taxes? I. 100% of the preceding tax year method II. Annualized income method A. I only. B. II only. C. Both I and II. D. Neither I nor II.

A This answer is correct. Interest paid on debt incurred to purchase tax exempt obligations is nondeductible. Similarly, interest on the automobile loan is considered personal interest and not deductible. The $1,800 interest on the home mortgage and the home mortgage prepayment penalty of $1,200 are qualified residence interest and will give the Parsells a total interest deduction of $3,000.

Jerry and Ann Parsell paid the following expenses during 2019: Interest on automobile loan $1,500 Interest on bank loan (loan proceeds were used to purchase municipal bonds) 5,000 Interest on home mortgage for period January 1 to June 29, 2019 1,800 Penalty payment for prepayment of home mortgage on June 29, 2019 1,200 What is the maximum amount that the Parsells can utilize as interest expense in calculating itemized deductions for 2019? A. $3,000 B. $3,150 C. $3,650 D. $4,500

A Since they were legally separated under a decree of separate maintenance on the last day of the taxable year and do not qualify for head-of-household status, they must each file as single.

John and Mary Arnold are a childless married couple who lived apart (alone in homes maintained by each) the entire year 2019. On December 31, 2019, they were legally separated under a decree of separate maintenance. Which of the following is the only filing status choice available to them when filing for 2019? A. Single. B. Head of household. C. Married filing separate return. D. Married filing joint return.

C Generally, no gain or loss is recognized on the contribution of property in exchange for a partnership interest. As a result, Curry's initial basis for the partnership interest received consists of the $30,000 adjusted basis of the land contributed to the partnership, less the net reduction in Curry's individual liability resulting from the partnership's assumption of the $12,000 mortgage. Since Curry received a 50% partnership interest, the net reduction in Curry's individual liability is $12,000 × 50% = $6,000. As a result, Curry's basis for the partnership interest is $30,000 − $6,000 = $24,000.

Jones and Curry formed Major Partnership as equal partners by contributing the assets below. Asset Adjusted basis Fair market value Jones Cash $45,000 $45,000 Curry Land 30,000 57,000 The land was held by Curry as a capital asset, subject to a $12,000 mortgage, that was assumed by Major. What was Curry's initial basis in the partnership interest? A. $45,000 B. $30,000 C. $24,000 D. $18,000

B A donee's basis for gift property is generally the same as the donor's basis, increased by any gift tax paid that is attributable to the property's net appreciation in value. That is, the amount of gift tax that can be added is limited to the amount that bears the same ratio as the property's net appreciation bears to the amount of taxable gift. For this purpose, the amount of gift is reduced by any portion of the $15,000 annual exclusion that is allowable with respect to the gift. Thus, Julie's basis is $25,000 + [$14,000 ($85,000 − 25,000) / ($85,000 − $15,000)] = $37,000.

Julie received a parcel of land as a gift from her Aunt Agnes in 2019. At the time of the gift, the land had a fair market value of $85,000 and an adjusted basis of $25,000. This was the only gift that Julie received from Agnes during 2019. If Agnes paid a gift tax of $14,000 on the transfer of the gift to Julie, what tax basis will Julie have for the land? A. $25,000 B. $37,000 C. $39,000 D. $85,000

B If you answered D, the answer is incorrect. The fact that Mint is a merchant is not relevant in determining whether or not Kent may disaffirm the purchase.

Kent, a 16-year old, purchased a used car from Mint Motors, Inc. Ten months later, the car was stolen and never recovered. Which of the following statements is correct? A. The car's theft is a de facto ratification of the purchase because it is impossible to return the car. B. Kent may disaffirm the purchase because Kent is a minor. C. Kent effectively ratified the purchase because Kent used the car for an unreasonable period of time. D. Kent may disaffirm the purchase because Mint, a merchant, is subject to the UCC.

D This answer is correct. The requirement is to determine the amount to be included as gross income in Lyle Corp.'s 2019 return for the receipt of nonprescription drug samples that were later donated to an exempt organization. When unsolicited samples of items that are normally inventoried and sold in the ordinary course of business are received from a supplier, and later donated as a charitable contribution, the fair market value of the items received must be included in gross income. The taxpayer is then allowed a charitable contribution equal to the fair market value of the items donated

Lyle Corp. is a distributor of pharmaceuticals and sells only to retail drugstores. During 2019, Lyle received unsolicited samples of nonprescription drugs from a manufacturer. Lyle donated these drugs in 2019 to a qualified exempt organization and deducted their fair market value as a charitable contribution. What should be included as gross income in Lyle's 2019 return for receipt of these samples? A. $0 B. $25 nominal value assigned to gifts C. Net discounted wholesale price D. Fair market value

C Correct! The requirement is to determine the amount of an S corporation's tax liability that resulted from the sale of an asset. A C corporation that makes an S election is subject to a corporate level tax of 21% on its net recognized built-in gain if the gain is attributable to its net unrealized built-in gain as of the first day of its S status and the gain is recognized within 10 years after the effective day of its S election. Here, Magic's net unrealized built-in gain on January 1 was $85,000 - $40,000 = $45,000. When Magic subsequently sold the asset for a $55,000 gain, $45,000 of the gain is a recognized built-in gain subject to tax at a rate of 21%, resulting in a built-in gains tax of $45,000 × 21% = $9,450.

Magic Corp., a regular C corporation, elected S corporation status at the beginning of the current calendar year. It had an asset with a basis of $40,000 and a fair market value (FMV) of $85,000 on January 1. The asset was sold during the year for $95,000. Magic's corporate tax rate was 21%. What was Magic's tax liability as a result of the sale? A. $0 B. $ 3,500 C. $9,450 D. $11,550

D This answer is correct. In a state that has adopted several liability, Ted & Ted would be required to pay only their share, $200,000.

Management of Tyler Company, a nonpublic company, materially misstated the company's financial statements that were audited by Ted & Ted, CPAs. Ted & Ted was negligent in the performance of the audit and failed to detect the misstatements. In reliance on the audited financial statements, Second Bank extended a loan in the amount of $500,000, and Tyler Company went bankrupt and was unable to repay any of the loan. Assume that Ted & Ted is determined to be 40% responsible for Second Bank's losses and management of Tyler Company is determined to be 60% liable. Which of the following is not true regarding this situation? A. In a state that has adopted joint and several liability, Ted & Ted may be required to pay the entire $500,000 in damages. B. In a state that has adopted joint liability, Ted & Ted may be required to pay the entire $500,000 in damages. C. In a state that has adopted several liability, Ted & Ted will likely be required to pay only $200,000 in damages. D. In a state that has adopted several liability, Ted & Ted will likely be required to pay the entire $500,000 but would be able to try to recover $300,000 from management.

C A limited partner is allowed, without losing the protection of limited liability, to act as an agent of the limited partnership. The limited partner may also vote on the removal of a general partner.

Mandy is a limited partner in a limited partnership in which Strasburg and Hua are the general partners. Which of the following may Mandy do without losing limited liability protection? I. Mandy acts as an agent of the limited partnership. II. Mandy votes to remove Strasburg as a general partner. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

A Generally, items of income and deduction whose book and tax treatment differ result in Schedule M-1 adjustments that reconcile income reported per books with taxable income. Media reported book income that included $6,000 in municipal bond interest income, and deductions that included $1,500 of interest expense incurred on debt to carry the municipal bonds, and $8,000 in advertising expense. Since municipal bond interest is tax-exempt, the $6,000 of interest income must be subtracted from book income. Additionally, since the $1,500 of interest expense to carry the municipal bonds is an expense incurred in the production of exempt income, it is not tax deductible and must be added back to book income. On the other hand, the $8,000 of advertising expense is deductible for book as well as taxable income purposes, and no Schedule M-1 adjustment is necessary. Thus, Media's net Schedule M-1 adjustment to reconcile book income to taxable income is $1,500 − $6,000 = ($4,500).

Media Corp. is an accrual-basis, calendar-year C corporation. Its 2019 reported book income included $6,000 in municipal bond interest income. Its expenses included $1,500 of interest incurred on indebtedness used to carry municipal bonds and $8,000 in advertising expense. What is Media's net M-1 adjustment on its 2019 Form 1120, U.S. Corporation Income Tax Return, to reconcile to its 2019 taxable income? A. $(4,500) B. $1,500 C. $3,500 D. $9,500

A The amount of credit (limited to tax liability) is 15% of an initial amount reduced by Social Security and 50% of AGI in excess of $10,000. Here, the credit is the lesser of (1) the taxpayers' tax liability of $61, or (2) 15% [$7,500 − $3,000 − (.50)($22,200 − $10,000)] = $0.

Melvin Crane is 66 years old, and his wife, Matilda, is 65. They filed a joint income tax return for 2019, reporting an adjusted gross income of $22,200, on which they owed a tax of $61. They received $3,000 from Social Security benefits in 2019. How much can they claim on Form 1040 in 2019, as a credit for the elderly? A. $0 B. $ 61 C. $255 D. $675

B The property factor would be counted twice and then the total would be divided by 4 to determine the average. The apportionment factor would then be (60% + 50% + 49% + 49%)/4 = 52%.

Miramar Corp. has total business income of $1 million, and in State XY has a sales factor of 60%, a payroll factor of 50%, and a property factor of 49%. What would be Miramar's State XY apportionment factor if State XY used an apportionment formula in which the property factor was double-weighted? A. 50% B. 52% C. 54.75% D. 60%

A If you answered D, it is incorrect because the offer is not a firm offer since the sale of land, not the sale of goods, is involved.

Montrose sent Bilbo a written offer to sell his tract of land located in Majorsville for $50,000. The parties were engaged in a separate dispute. The offer stated that it would be irrevocable for 30 days if Bilbo would promise to refrain from suing Montrose during this time. Bilbo promptly delivered a promise not to sue during the term of the offer and to forego suit if she accepted the offer. Montrose subsequently decided that the possible suit by Bilbo was groundless and therefore phoned Bilbo and revoked the offer 10 days after making it. Bilbo mailed an acceptance on the 30th day. Montrose did not reply. Under the circumstances A. Montrose's offer was supported by consideration, and was irrevocable for the 30 day period. B. Bilbo's promise was accepted by Montrose by his silence. C. Montrose's revocation, not being in writing, was invalid. D. Montrose's written offer would be irrevocable even without consideration.

D An individual's charitable contribution to public charities may not exceed 50%/60% of the individual's adjusted gross income. The 50%/60% deduction ceiling applies to contributions made to: churches; educational institutions that maintain a regular faculty and curriculum; hospitals and medical schools; organizations supported by the government that hold property and/or investments for the benefit of a college or university; federal, state or local governmental units; and organizations normally receiving most of its support from the public or a governmental unit. The amount that exceeds the 50%/60% deduction ceiling may be carried forward for 5 years. Since Moore's charitable contributions were made to an organization (a church) qualifying for a 50%/60% deduction ceiling, she may deduct up to $30,000, 50%/60% of her adjusted gross income of $50,000. Moore may meet this ceiling by deducting the $18,000 that she contributed to her church in 2019 and carrying forward $10,000 charitable contribution carryover from her 2018 church contribution. She can deduct $28,000.

Moore, a single taxpayer, had $50,000 in adjusted gross income for 2019. During 2019, she contributed $18,000 to her church. She had a $10,000 charitable contribution carryover from her 2018 church contribution. What was the maximum amount of properly substantiated charitable contributions that Moore could claim as an itemized deduction for 2019? A. $10,000 B. $18,000 C. $25,000 D. $28,000

C The doctrine of anticipatory repudiation allows a party to either sue at once or wait until after performance is due when the other party indicates s/he will not perform. This doctrine is in effect because Nagel told Fields that Nagel had no intention of delivering the goods (i.e., repudiation of the contract) prior to the date of performance.

Nagel and Fields entered into a contract in which Nagel was obligated to deliver certain goods to Fields by September 10. On September 3, Nagel told Fields that Nagel had no intention of delivering the goods required by the contract. Prior to September 10, Fields may successfully sue Nagel under the doctrine of A. Promissory estoppel. B. Accord and satisfaction. C. Anticipatory repudiation. D. Substantial performance.

C If you answered D, the answer is wrong. For 2016, the year of death, the filing status is married filing jointly. Since she maintains a home for a dependent child in 2017 and 2018 her filing status was surviving spouse. Surviving spouse is allowed for only two years after the date of death. So, for 2019 her filing status is head of household. This response incorrectly indicates that her filing status is surviving spouse for 2019.

Nell Brown's husband died in 2016. Nell did not remarry, and continued to maintain a home for herself and her dependent infant child during 2017, 2018, and 2019, providing full support for herself and her child during these three years. For 2016, Nell properly filed a joint return. For 2019, Nell's filing status is A. Single. B. Married filing joint return. C. Head of household. D. Qualifying widow with dependent child.

B The Statute of Frauds applies to real property transactions like this one and generally requires that they be in writing to be enforceable. However, there is an exception to this part of the Statute if the buyer, by taking possession of the property, making improvements, and making a down payment and improvements cannot be returned to the status quo. In such a case, the oral agreement is perfectly valid and enforceable.

Nolan agreed orally with Train to sell Train a house for $100,000. Train sent Nolan a signed agreement and a down payment of $10,000. Nolan did not sign the agreement but allowed Train to move into the house. Before closing, Nolan refused to go through with the sale. Train sued Nolan to compel specific performance. Under the provisions of the Statute of Frauds, A. Train will win because Train signed the agreement and Nolan did not object. B. Train will win because Train made a down payment, took possession, and made improvements. C. Nolan will win because Nolan did not sign the agreement. D. Nolan will win because the house was worth more than $500.

C Since she has two dependent preschool children, all $6,000 paid for child care qualifies for the credit. The credit is 35% of qualified expenses, but is reduced by one percentage point for each $2,000 (or fraction thereof) of AGI over $15,000 down to a minimum of 20%. Since Nora's AGI is $44,000, her credit is 20% × $6,000 = $1,200.

Nora Hayes, a widow, maintains a home for herself and her two dependent preschool children. In 2019, Nora's earned income and adjusted gross income was $44,000. During 2019, Nora paid work-related expenses of $6,000 for a housekeeper to care for her children. How much can Nora claim for child care credit in 2019? A. $0 B. $ 960 C. $1,200 D. $2,100

D This answer is correct. The MACRS deduction for nonresidential real property must be determined using the midmonth convention (i.e., property is treated as placed in service at the midpoint of the month placed in service) and the straight-line method of depreciation over a 39-year recovery period. Here, the $264,000 cost of the office building must first be reduced by the $30,000 allocated to the land, to arrive at a basis for depreciation of $234,000. Since the building was placed in service on August 1, the midmonth convention results in 4.5 months of depreciation for 2019. The MACRS deduction for 2019 is [$234,000 × (4.5 months) / (39 × 12 months)] = $2,250.

On August 1, 2019, Graham purchased and placed into service an office building costing $264,000 including $30,000 for the land. If Graham is a calendar-year taxpayer, what is Graham's MACRS deduction for the office building for 2019? A. $9,600 B. $6,000 C. $3,600 D. $2,250

D This answer is correct. A partnership interest is a capital asset and a sale generally results in capital gain or loss, except that ordinary income must be reported to the extent of the selling partner's share of unrealized receivables and appreciated inventory. Here, Clark realized $55,000 from the sale of his partnership interest ($30,000 cash + relief from his $25,000 share of partnership liabilities). Since the partnership had no unrealized receivables nor appreciated inventory and the basis of Clark's interest was $40,000, Clark realized a capital gain of $55,000 − $40,000 = $15,000 from the sale.

On December 31, after receipt of his share of partnership income, Clark sold his interest in a limited partnership for $30,000 cash and relief of all liabilities. On that date, the adjusted basis of Clark's partnership interest was $40,000, consisting of his capital account of $15,000 and his share of the partnership liabilities of $25,000. The partnership has no unrealized receivables or substantially appreciated inventory. What is Clark's gain or loss on the sale of his partnership interest? A. Ordinary loss of $10,000 B. Ordinary gain of $15,000 C. Capital loss of $10,000 D. Capital gain of $15,000

D A partnership functions as a pass-through entity and its items of income and deduction are passed through to partners according to their profit and loss sharing ratios, which may differ from the ratios used to divide capital. Here, Arch's distributive share of the partnership's ordinary income is $40,000 × 75% = $30,000. Note that Arch will be taxed on his $30,000 distributive share of ordinary income even though only $5,000 was distributed to him.

On January 2, 2019, Arch and Bean contribute cash equally to form the JK Partnership. Arch and Bean share profits and losses in a ratio of 75% to 25%, respectively. For 2019, the partnership's ordinary income was $40,000. A distribution of $5,000 was made to Arch during 2019. What amount of ordinary income should Arch report from the JK Partnership for 2019? A. $ 5,000 B. $10,000 C. $20,000 D. $30,000

C This answer is correct because under the provisions of the Bankruptcy Code, the trustee in bankruptcy is given the option, subject to court approval, to (1) assume and perform the unexpired lease, (2) assume and assign the unexpired lease to a third party, or (3) reject the unexpired lease. In a liquidation case, the trustee must act to assume within 60 days after the order for relief is entered. If not assumed within this time, the lease is deemed rejected. Thus, the trustee may elect to not assume the equipment lease.

On June 5, year 1, Green rented equipment under a 5-year lease. On March 8, year 2, Green was involuntarily petitioned into bankruptcy under the liquidation provisions of the Bankruptcy Code, and a trustee was appointed. The fair market value of the equipment exceeds the balance of the lease payments due. The trustee A. Must assume the equipment lease because its term exceeds 1 year. B. Must assume and subsequently assign the equipment lease. C. May elect not to assume the equipment lease. D. May not reject the equipment lease because the fair market value of the equipment exceeds the balance of the lease payments due.

C This answer is correct. A mutual mistake occurs when two parties intentionally enter into an agreement, but under an erroneous conviction. In this case, at the time of entering the contract, both parties reasonably believed that the destroyed painting was still in existence. Thus Maple's best defense is that there was a mutual mistake of an existing fact, which renders the contract voidable.

On May 6, Maple entered into a signed contract with Ard, whereby Maple was to sell Ard a painting having a fair market value of $350,000 for $130,000. Maple believed the painting was worth only $130,000. Unknown to either party the painting had been destroyed by fire on May 4. If Ard sued Maple for breach of contract, Maple's best defense is A. Risk of loss had passed to Ard. B. Lack of adequate consideration. C. Mutual mistake. D. Unconscionability.

A This answer is correct. The partnership was terminated on November 1, 2019, the date on which Kerry and Payne sold their interests to Reed. On that date, the business ceased to operate as a partnership because the operation of a partnership requires two or more partners.

On November 1, 2019, Kerry and Payne, each of whom was a 20% partner in the calendar-year partnership of Roe Co., sold their partnership interests to Reed, who was a 60% partner. For tax purposes, the Roe Co. partnership A. Was terminated as of November 1, 2019. B. Was terminated as of December 31, 2019. C. Continues in effect until a formal partnership dissolution notice is filed with the IRS. D. Continues in effect until a formal partnership dissolution resolution is filed in the office of the county clerk where Roe Co. had been doing business.

D The stock should be treated as a capital asset held long-term since (1) property acquired from a decedent is considered to be held for more than 12 months regardless of its actual holding period, and (2) the stock is an investment asset in Lois's hands. The stock is not a Sec. 1231 asset because it was not held for use in Lois's trade or business.

On October 1, 2019, Lois Rice learned that she was bequeathed 1,000 shares of Elin Corp. common stock under the will of her uncle, Pat Prevor. Pat had paid $5,000 for the Elin stock in 2014. Fair market value of the Elin stock on October 1, 2019, the date of Pat's death, was $8,000 and had increased to $11,000 six months later. The executor of Pat's estate elected the alternative valuation for estate tax purposes. Lois sold the Elin stock for $9,000 on December 1, 2019, the date that the executor distributed the stock to her. Lois should treat the 1,000 shares of Elin stock as a A. Short-term Section 1231 asset. B. Long-term Section 1231 asset. C. Short-term capital asset. D. Long-term capital asset.

C May 12 Sale Amount realized (500 × $23) $11,500 Adjusted basis (500 × $25) (12,500) Realized loss $(1,000) Since 250 shares of the Jackey stock was repurchased within 60 days of the sale date (30 days before/30 days after), 50% of the realized loss is not recognized. So the recognized loss is $500. The basis in the 250 shares purchased on May 28 is $6,000 (cost of $5,500 + the deferred loss of $500). The cost per share is $24 ($6,000/250 shares). October 15 Sale Amount realized (100 × $18) $ 1,800 Adjusted basis (100 × $24) (2,400) Realized loss and recognized loss $(600) The total capital loss is $1,100 ($500 + $600).

On year 1, Janice had the following transactions in Jacky, Inc., common stock: Shares Price Jan. 01—Purchase 500 $25 May 12—Sale 500 $23 May 28—Purchase 250 $22 Oct. 15—Sale 100 $18 What is Janice's deductible capital loss? A. $400 B. $700 C. $1,100 D. $1,400

C If you answered D, the answer is incorrect. Cosureties exist when there is more than one surety guaranteeing the same obligation of the principal debtor. Unless the creditor specifically reserves his/her rights, a release of a cosurety by the creditor will release the other cosurety to the extent of the released cosurety's pro rata share of debt liability. Both Ott and Bane agreed to act as cosureties for the full amount of the loan, $80,000. Their pro rata share of the debt was $40,000 ($80,000 / 2). Since Cread did not reserve its rights against Bane when it released Ott, Bane would only be liable for $40,000.

Ott and Bane agreed to act as cosureties on an $80,000 loan that Cread Bank made to Dash. Ott and Bane are each liable for the entire $80,000 loan. Subsequently, Cread released Ott from liability without Bane's consent and without reserving its rights against Bane. If Dash subsequently defaults, Cread will be entitled to collect a maximum of A. $0 from Bane. B. $0 from Dash. C. $40,000 from Bane. D. $40,000 from Dash.

A This answer is correct. The requirement is to identify whom Rice has a cause of action against. Since Part was acting as an agent but did not disclose to Rice that Young was Part's principal, Young was a partially disclosed principal. In such cases, third parties such as Rice are permitted to have a cause of action against both the agent and the partially disclosed principal.

Part agreed to act as Young's agent to sell Young's land. Part was instructed to disclose that Part was acting as an agent but not to disclose Young's identity. Part contracted with Rice for Rice to purchase the land. After Rice discovered Young's identity, Young refused to fulfill the contract. Whom does Rice have a cause of action against? ---------Part------------------Young A.-----------Yes---------------Yes B. -----------Yes----------------No C.-----------No----------------Yes D.-----------No----------------No

D No gain or loss is recognized on the exchange of business or investment property for property of a like-kind. The term "like-kind" means the same class of property (i.e., real estate must be exchanged for real estate). Thus, the exchange of an apartment building for an office building qualifies as a like-kind exchange. Since no boot (money or unlike property) was received, the realized gain of $600,000 − $200,000 = $400,000 is not recognized.

Pat Leif owned an apartment house that he bought in 2006. Depreciation was taken on a straight-line basis. In 2019, when Pat's adjusted basis for this property was $200,000, he traded it for an office building having a fair market value of $600,000. The apartment house has 100 dwelling units, while the office building has 40 units rented to business enterprises. The properties are not located in the same city. What is Pat's reportable gain on this exchange? A. $400,000 Section 1250 gain B. $400,000 Section 1231 gain C. $400,000 long-term capital gain D. $0

C An agency coupled with an interest arises when an agent acquires from the principal an interest in the subject matter of the agency. In the absence of a contractual provision relating to the term of the agency, the authority of the agent (Astor) is irrevocable by the principal (Pell). If there is no time period specified for the agency, then the agent (Astor) may terminate at any time without liability, regardless of the type of agency.

Pell is the principal and Astor is the agent in an agency coupled with an interest. In the absence of a contractual provision relating to the duration of the agency, who has the right to terminate the agency before the interest has expired? Pell Astor A. Yes Yes B. Yes No C. No Yes D. No No

B This answer is correct because even perfection will not protect a secured party when a purchaser buys goods in the ordinary course of business from a seller who deals in goods of that kind. The purchaser will take free of any existing security interest (perfected or unperfected) even if the buyer knows of the secured party's security interest at the time of the sale. Therefore, a buyer in the ordinary course of the debtor's business will be unaffected by a prior perfected security interest.

Perfection of a security interest under the UCC by a creditor provides added protection against other parties in the event the debtor does not pay his debts. Which of the following is not affected by perfection of a security interest? A. The trustee in a bankruptcy proceeding. B. A buyer in the ordinary course of business. C. A subsequent personal injury judgment creditor. D. Other prospective creditors of the debtor.

C Pierce has made an assignment of his benefits under the contract or named Duke as a creditor beneficiary. Either way, Duke has contract rights against both of them as an assignee or a creditor beneficiary.

Pierce owed Duke $3,000. Pierce contracted with Lodge to paint Lodge's house and Lodge agreed to pay Duke $3,000 to satisfy Pierce's debt. Pierce painted Lodge's house, but Lodge did not pay Duke the $3,000. In a lawsuit by Duke against Pierce and Lodge, who will be liable to Duke? A. Pierce only B. Lodge only C. Both Pierce and Lodge D. Neither Pierce nor Lodge

B If an individual receives less than $20 in tips during one month while working for one employer, the tips do not have to be reported to the employer and the tips are included in the individual's gross income when received. However, if an individual receives $20 or more in tips during one month while working for one employer, the individual must report the total amount of tips to that employer by the tenth day of the next month. Then the tips are included in gross income for the month in which they are reported to the employer. Here, Pierre received $2,000 in tips during December 2019 that he reported to his employer in January 2020. Thus, the $2,000 of tips will be included in Pierre's gross income for 2020.

Pierre, a headwaiter, received tips totaling $2,000 in December 2019. On January 5, 2020, Pierre reported this tip income to his employer in the required written statement. At what amount, and in which year, should this tip income be included in Pierre's gross income? A. $2,000 in 2019 B. $2,000 in 2020 C. $1,000 in 2019, and $1,000 in 2020 D. $ 167 in 2019, and $1,833 in 2020

C This answer is correct. To determine Poole's taxable income, his adjusted gross income must be reduced by the greater of his itemized deductions or a standard deduction. Since Poole's medical expenses of $19,450 are deductible to the extent in excess of 10% of his AGI of $30,000, his itemized deductions of $16,450 ($19,450 − $3,000) exceed his available standard deduction of $12,200. Poole's tax computation is as follows: Adjusted gross income $30,000 Less: Itemized deductions $16,450 Taxable income $13,550 Tax rate × 10% Income tax $ 1,355

Poole, 45 years old and unmarried, is in the 10% tax bracket. He had 2019 adjusted gross income of $30,000. The following information applies to Poole: Medical expenses $19,450 Standard deduction 12,200 Poole wishes to minimize his income tax. What is Poole's 2019 total income tax? A. $0 B. $3,000 C. $1,355 D. $690

A Tax preferences include the $1,000 of tax-exempt interest on private activity bonds. It must be added to regular taxable income in arriving at alternative minimum taxable income (AMTI). The adjustments include $1,500 of state income taxes that are deductible in computing regular taxable income but are not deductible in computing AMTI.

Randy Lowe reported the following items in computing his regular federal income tax for 2019: Itemized deduction for state taxes 1,500 Cash charitable contributions 1,250 Net long-term capital gain 700 Tax-exempt interest from private activity bonds issued in 2016 1,000 What are the amounts of tax preference items and adjustments that must be added to or subtracted from regular taxable income in order to compute Lowe's alternative minimum taxable income for 2019? Preferences Adjustments A. $1,000 $1,500 B. $1,000 $2,750 C. $1,700 $6,150 D. $2,250 $1,250

A A self-employed individual must file an income tax return if net earnings from self-employment are $400 or more.

Ray Birch, age 60, is single with no dependents. Birch's only income is from his occupation as a self-employed plumber. Birch must file a return for 2019 if his net earnings from self-employment are at least A. $ 400 B. $ 950 C. $4,050 D. $6,100

D This answer is correct. All three items are sufficient consideration under The Revised Model Business Corporations Act.

Reilly has agreed to purchase some stock of Jansen Corporation. Which of the following types of consideration or value is(are) sufficient to purchase this stock? I. Services already performed by Reilly. II. Services promised by Reilly to be performed at a later date. III. Negotiable promissory note to pay cash. A. I only. B. I and II only. C. I and III only. D. I, II and III.

C Brown's contribution of $12,000 will be recovered pro rata over the life of the annuity. Under this rule, $100 per month (12,000 ÷ 120 months) is excluded from income. Received Excluded Included 2019 $4,900 $ 700 $4,200 2020 8,400 1,200 7,200 2021 8,400 1,200 7,200

Richard Brown, who retired on May 31, 2019, receives a monthly pension benefit of $700 payable for life. His life expectancy at the date of retirement is 10 years. The first pension check was received on June 15, 2019. During his years of employment, Brown contributed $12,000 to the cost of his company's pension plan. How much of the pension amounts received may Brown exclude from taxable income for the years 2019, 2020, and 2021? 2019 2020 2021 A. $0 $0 $0 B. $4,900 $4,900 $4,900 C. $ 700 $1,200 $1,200 D. $4,900 $8,400 $8,400

B This answer is correct. A state income tax refund must be included in gross income for the current year under the tax benefit rule to the extent that the refunded amount was deducted in a prior year and the deduction provided a benefit by reducing the taxpayer's federal income tax for the prior year. Here, Robbe's $10,000 itemized deduction for state income tax provided a benefit only to the extent that it exceeded the standard deduction that was otherwise available to him. As a result, only $1,150 of the $1,500 refund must be included in gross income for the current year.

Robbe, a cash-basis single taxpayer, reported $50,000 of adjusted gross income last year and claimed itemized deductions of $13,350, consisting solely of $10,000 of state income taxes paid last year and $3,350 of charitable contributions. Robbe's itemized deduction amount, which exceeded the standard deduction available to single taxpayers for last year by $1,150, was fully deductible and it was not subject to any limitations or phase-outs. In the current year, Robbe received a $1,500 state tax refund relating to the prior year. What is the proper treatment of the state tax refund? A. Include none of the refund in income in the current year. B. Include $1,150 in income in the current year. C. Include $1,500 in income in the current year. D. Amend the prior year's return and reduce the claimed itemized deductions for that year.

C The $3,600 of home mortgage interest, and the $900 mortgage prepayment penalty are fully deductible as interest expense in computing itemized deductions. The $1,200 interest on the life insurance policy is not deductible since it is classified as personal interest.

Robert and Judy Parker made the following payments during 2019: Interest on a life insurance policy loan (the loan proceeds were used for personal use) $1,200 Interest on home mortgage for period January 1 to October 4, 2019 3,600 Penalty payment for prepayment of home mortgage on October 4, 2019 900 How much can the Parkers utilize as interest expense in calculating itemized deductions for 2019? A. $5,700 B. $4,620 C. $4,500 D. $3,600

B The credit is from 20% to 35% of certain dependent care expenses limited to the lesser of (1) $3,000 for one qualifying individual, $6,000 for two or more; (2) taxpayer's earned income, or spouse's if smaller; or (3) actual expenses. The $2,500 paid to the Union Day Care Center qualifies, as does the $1,000 paid to Wilma Jason. Payments to relatives qualify if the relative is not a dependent of the taxpayer. Since Robert and Mary Jason only claimed three exemptions, Wilma was not their dependent. The $500 paid to Acme Home Cleaning Service does not qualify since it is completely unrelated to the care of their child. To qualify, expenses must be at least partly for the care of a qualifying individual. Since qualifying expenses exceed $3,000, the Jasons' credit is 20% × $3,000 = $600.

Robert and Mary Jason, filing a joint tax return for 2019, had a tax liability of $9,000 based on their tax table income and three exemptions. Robert and Mary had earned income of $30,000 and $22,000, respectively, during 2019. In order for Mary to be gainfully employed, the Jasons incurred the following employment-related expenses for their four-year-old son John in 2019: Payee Amount Union Day Care Center $2,500 Acme Home Cleaning Service 500 Wilma Jason, babysitter (Robert Jason's mother) 1,000 Assuming that the Jasons do not claim any other credits against their tax, what is the amount of the child care tax credit they should report on their tax return for 2019? A. $ 500 B. $ 600 C. $ 700 D. $1,050

C This answer is correct. The MACRS five-year property classification includes autos and taxis, light and heavy general-purpose trucks, calculators, copiers, computers, and peripheral equipment. The MACRS seven-year property classification includes office furniture, fixtures, and equipment, as well as agricultural machinery and equipment. Here, the $3,000 computer and $25,000 delivery van fall within the five-year property classification, while the computer desk and office furniture would be classified as seven-year property.

Rock Crab, Inc. purchases the following assets during the year: Computer 3,000 Computer desk 1,000 Office furniture 4,000 Delivery van 25,000 What should be reported as the cost basis for MACRS five-year property? A. $ 3,000 B. $25,000 C. $28,000 D. $33,000

B The donation of appreciated stock held more than 12 months is a contribution of intangible, long-term capital gain appreciated property. The amount of contribution is the stock's FMV of $70,000, but is limited in deductibility for 2019 to 30% of AGI. Thus, the 2019 deduction is $100,000 × 30% = $30,000. The amount of contribution in excess of the 30% limitation ($70,000 − $30,000 = $40,000) can be carried forward for up to five years, subject to the 30% limitation in the carryforward years.

Ruth Lewis has adjusted gross income of $100,000 for 2019 and itemizes her deductions. On September 1, 2019, she made a contribution to her church of stock held for investment for two years that cost $10,000 and had a fair market value of $70,000. The church sold the stock for $70,000 on the same date. Assume that Lewis made no other contributions during 2019 and made no special election in regard to this contribution on her 2019 tax return. How much should Lewis claim as a charitable contribution deduction for 2019? A. $50,000 B. $30,000 C. $20,000 D. $10,000

D An S corporation shareholder increases/decreases her basis in the S corporation stock by her share of the corporation's income (taxable and nontaxable) and expenses (deductible and nondeductible). Distributions also reduce the stock basis. Sandy's basis is reduced to $40,000 for the distribution ($60,000 - $20,000) and is increased for all three income items for an ending basis of $85,000 ($40,000 + $30,000 + $5,000 + $10,000).

Sandy is the sole shareholder of Swallow, an S corporation. Sandy's adjusted basis in Swallow stock is $60,000 at the beginning of the year. During the year, Swallow reports the following income items: Ordinary income $30,000 Tax-exempt income 5,000 Capital gains 10,000 In addition, Swallow makes a nontaxable distribution to Sandy of $20,000 during the year. What is Sandy's adjusted basis in the Swallow stock at the end of the year? A. $60,000 B. $70,000 C. $80,000 D. $85,000

C This answer is correct because in an action brought under the Securities Exchange Act of 1934, Section 10(b) and Rule 10b-5 the plaintiff (Wisk) must prove that damages were incurred as a result of the act, that there was a material misstatement or omission, that s/he relied upon the financial information, and that scienter exists. Scienter is generally defined as the knowledge of or the intent to deceive, defraud, or manipulate. Thus, Sharp will prevail if Wisk is unable to prove that Sharp had knowledge of the misrepresentations or that Sharp had intended to deceive or defraud (scienter).

Sharp & Co., CPAs, was engaged by Radar Corp. to audit its financial statements. Sharp issued an unqualified opinion on Radar's financial statements. Radar has been accused of making negligent misrepresentations in the financial statements which Wisk relied upon when purchasing Radar stock. Sharp was not aware of the misrepresentations nor was it negligent in performing the audit. If Wisk sues Sharp for damages based upon Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, Sharp will A. Lose, since the statements contained negligent misrepresentations. B. Lose, since Wisk relied upon the financial statements. C. Prevail, since some element of scienter must be proved. D. Prevail, since Wisk was not in privity of contract with Sharp.

D A corporation may deduct up to $5,000 of organizational expenditures for the tax year in which the corporation begins business. The $5,000 amount must be reduced by the amount by which organizational expenditures exceed $50,000. Remaining expenditures are deducted ratably over the 180-month period beginning with the month in which the corporation begins business. Here, since organizational expenditures total $8,600, $5,000 can be deducted for 2018, with the remaining $3,600 deducted ratably over the 180-month period beginning with September (the month in which the corporation began business). Thus, the maximum deduction for 2018 would be $5,000 + ($3,600 × 4/180) = $5,080.

Silo Corp. was organized on March 1, 2019, and began doing business on September 1, 2019, and elected to file its income tax return on a calendar-year basis. The following qualifying organizational expenditures were incurred in organizing the corporation: July 1, 2019 $3,000 September 3, 2019 5,600 The maximum allowable deduction for organizational expenditures for 2019 is A. $ 600. B. $3,000. C. $5,000. D. $5,080.

C If you answered D, it is incorrect because the issue of which party transcribed the contract is not relevant when deciding whether a mistake is present that will create a voidable agreement.

Silvers entered into a contract which contains a substantial arithmetical error. Silvers asserts mistake as a defense to his performance. Silvers will prevail A. Only if the mistake was a mutual mistake. B. Only if the error was not due to his negligence. C. If the error was unilateral and the other party knew of it. D. If the contract was written by the other party.

C There is no general requirement that an agency agreement be in writing in order to be enforceable, but this choice illustrates a case in which a writing is required. Some parts of the Statute of Frauds influence even agency agreements. If the agent will be dealing with real property, or making an agreement to act as an agent for over one year, the agreement must be in writing. Here, land is real property. Note that the other parts of the Statute of Frauds do not apply to agency situations. If the agent will sell goods of over $500 in value, or will deal with suretyships, a spoken agreement is acceptable.

Simpson, Ogden Corp.'s agent, needs a written agency agreement to A. Enter into a series of sales contracts on Ogden's behalf. B. Hire an attorney to collect a business debt owed to Ogden. C. Purchase an interest in undeveloped land for Ogden. D. Retain an independent general contractor to renovate Ogden's office building.

C A donee's basis for appreciated property received as a gift is generally the same as the donor's basis. Since Smith had a basis for the property of $1,200 and Thompson sold the property for $2,500, Thompson must recognize a gain of $1,300.

Smith made a gift of property to Thompson. Smith's basis in the property was $1,200. The fair market value at the time of the gift was $1,400. Thompson sold the property for $2,500. What was the amount of Thompson's gain on the disposition? A. $0 B. $1,100 C. $1,300 D. $2,500

B If you answered C, the answer is incorrect because if Smith acts in good faith, Smith is not generally liable to the corporation.

Smith was an officer of CCC Corp. As an officer, the business judgment rule applied to Smith in which of the following ways? A. Because Smith is not a director, the rule does not apply. B. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally not liable to CCC for damages caused. C. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, but CCC may elect to reimburse Smith for any damages Smith paid. D. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, and CCC is prohibited from reimbursing Smith for any damages Smith paid.

A Under wash-sale rules, taxpayers may not recognize losses attributable to the sale of stock or securities if substantially identical stock or securities are purchased 30 days before or after the sale giving rise to the loss. Wash-sale rules do not prevent the recognition of gains from these sales. Smith sold 100 shares of Core Co. common stock on January 3, 2020, for $13,000. As the stock was purchased for $15,000, Smith sustained a loss of $2,000 on the transaction. However, Smith may not recognize this loss because Smith purchased an additional 100 shares for $13,000 on December 30, 2019, which was within 30 days before or after the January 3, 2020, sale. Thus, Smith may not recognize a loss in either 2019 or 2020.

Smith, an individual calendar-year taxpayer, purchased 100 shares of Core Co. common stock for $15,000 on December 15, 2019, and an additional 100 shares for $13,000 on December 30, 2019. On January 3, 2020, Smith sold the shares purchased on December 15, 2019, for $13,000. What amount of loss from the sale of Core's stock is deductible on Smith's 2019 and 2020 income tax returns? 2019 2020 A. $0 $0 B. $0 $2,000 C. $1,000 $1,000 D. $2,000 $0

C Since Sol is covered by his employer's pension plan, Sol's contribution of $6,000 is proportionately phased out as a deduction by AGI between $103,000 and $123,000. Since the Cranes' AGI exceeded $123,000, no deduction is allowed for Sol's contribution. Although Julia is not employed, $6,000 can be contributed to her IRA because the combined earned income on the Cranes' return is at least $12,000. The maximum IRA deduction for an individual who is not covered by an employer plan, but whose spouse is, is proportionately phased out for AGI between $193,000 and $203,000 for 2019. Since Julia is not covered by an employer plan and the Cranes' AGI is below $193,000, the $6,000 contribution to Julia's IRA is fully deductible for 2019.

Sol and Julia Crane (both age 43) are married and will file a joint return for 2019. Sol earned a salary of $140,000 in 2019 from his job at Troy Corp., where Sol is covered by his employer's pension plan. In addition, Sol and Julia earned interest of $3,000 in 2019 on their joint savings account. Julia is not employed, and the couple had no other income. On July 15, 2019, Sol contributed $6,000 to an IRA for himself and $6,000 to an IRA for his spouse. The allowable IRA deduction in the Cranes' 2019 joint return is A. $0. B. $3,000. C. $6,000. D. $12,000.

C The cash contribution of $4,000 to church and the $600 fair market value of the used clothing donated to Salvation Army are fully deductible. However, the deduction for the art object is limited to the $400 excess of its cost ($1,200) over its fair market value ($800).

Spencer, who itemizes deductions, had adjusted gross income of $60,000 in 2019. The following additional information is available for 2019: Cash contribution to church $4,000 Purchase of art object at church bazaar (with a fair market value of $800 on the date of purchase) 1,200 Donation of used clothing to Salvation Army (fair value evidenced by receipt received) 600 What is the maximum amount Spencer can claim as a deduction for charitable contributions for 2019? A. $5,400 B. $5,200 C. $5,000 D. $4,400

C This answer is correct because when Parker anticipatorily repudiated a contract, Stone could immediately sue for breach of contract or wait for performance on the appointed date, and then sue for breach if performance was not rendered.

Stone engaged Parker to perform personal services for $1,000 a month for a period of 3 months. The contract was entered into orally on August 1, year 1, and performance was to commence on January 1, year 2. On September 15, year 1, Parker anticipatorily repudiated the contract. As a result, Stone can A. Obtain specific performance. B. Not assign her rights to damages under the contract to a third party. C. Immediately sue for breach of contract. D. Not enforce the contract against Parker since the contract is oral.

D This answer is correct. Gain will be recognized by a distributee partner in a nonliquidating distribution if the amount of money received exceeds the partner's basis for the partnership interest. Additionally, gain or loss may be recognized by a distributee partner if a nonliquidating distribution is disproportionate with respect to the partner's interest in partnership property. A distribution is disproportionate if the partner receives more than the partner's share of unrealized receivables and substantially appreciated inventory, and in return relinquishes a share in other assets, or receives more than the partner's share in capital and Sec. 1231 assets, and in return, relinquishes an interest in the partnership's unrealized receivables and substantially appreciated inventory. In this case, the Ace Partnership has no unrealized receivables, appreciated inventory, or properties which had been contributed by its partners, so the distribution received by Stone cannot be disproportionate. Since gain will never be recognized in a proportionate noncash distribution of property, Stone recognizes no gain on the distribution and will have a transferred basis of $65,000 in the capital assets received and a basis of $5,000 for his continuing partnership interest.

Stone's basis in Ace Partnership was $70,000 at the time he received a nonliquidating distribution of partnership capital assets. These capital assets had an adjusted basis of $65,000 to Ace, and a fair market value of $83,000. Ace had no unrealized receivables, appreciated inventory, or properties which had been contributed by its partners. What was Stone's recognized gain or loss on the distribution? A. $18,000 ordinary income. B. $13,000 capital gain. C. $ 5,000 capital loss. D. $0.

C Property held for use in a trade or business is specifically excluded from the definition of capital assets, and if held for more than one year is considered Sec. 1231 property.

Tally Corporation sold machinery that had been used in its business for a loss of $22,000 during 2019. The machinery had been purchased and placed in service sixteen months earlier. For 2019, the $22,000 loss will be treated as a A. Capital loss. B. Sec. 1245 loss. C. Sec. 1231 loss. D. Casualty loss because the machinery was held less than two years.

A This answer is correct. Alimony is a cash payment to (or on behalf of) a spouse or former spouse that is required by a divorce decree or written separation agreement. Alimony does not include child support, nor any noncash property settlements. Here, Tana's alimony deduction is limited to the alimony payments of $3,000.

Tana's divorce decree requires Tana to make the following transfers to Tana's former spouse during the current year for a divorce finalized before 2019: Alimony payments of $3,000 Child support of $2,000 Property division of stock with a basis of $4,000 and a fair market value of $6,500 What is the amount of Tana's alimony deduction for 2019? A. $ 3,000 B. $ 7,000 C. $ 9,500 D. $11,500

C Correct! A subchapter S election that is filed on or before the 15th day of the third month of a corporation's taxable year is generally effective as of the beginning of the taxable year in which filed. If the S election is filed after the 15th day of the third month, the election is generally effective as of the first day of the corporation's next taxable year. Tau Corp. uses a fiscal year which begins November 1 and ends October 31 of each year. Here, its S election was filed on May 15, 2019, which is beyond the 15th day of the third month of its taxable year (January 15th). Therefore, Tau Corp.'s Subchapter S election will become effective as of the first day of its next taxable year, November 1, 2019.

Tau Corp., which has been operating since 2014, has an October 31 year-end, which coincides with its natural business year. On May 15, 2019, Tau filed the required form to elect S corporation status. All of Tau's stockholders consented to the election, and all other requirements were met. The earliest date that Tau can be recognized as an S corporation is A. November 1, 2018. B. May 15, 2019. C. November 1, 2019. D. January 1, 2020.

B This answer is correct because under the common law, an acceptance must be unequivocal and unqualified, in the precise terms in which the offer specified. The Uniform Commercial Code alters this general rule as far as the sale of goods is concerned. An offer to buy goods for prompt shipment is construed to invite acceptance, either by a prompt promise to ship or prompt shipment unless the language of the offer specifically stipulates otherwise. Peel may accept Taylor's offer by promptly promising to ship the goods or by prompt shipment.

Taylor signed and mailed a letter to Peel which stated: "Ship promptly 600 dozen grade A eggs." Taylor's offer A. May be accepted by Peel only by a prompt shipment. B. May be accepted by Peel either by a prompt promise to ship or prompt shipment with notice. C. Is invalid since the price terms were omitted. D. Is invalid since the shipping terms were omitted.

B Sec. 1250 recaptures gain as ordinary income to the extent of "excess" depreciation (i.e., depreciation deducted in excess of straight line). The total gain less any depreciation recapture is Sec. 1231 gain. Since straight-line depreciation was used, there is no recapture under Sec. 1250. However, Sec. 291 requires that the amount of ordinary income on the disposition of Sec. 1250 property by corporations be increased by 20% of the additional amount that would have been ordinary income if the property had instead been Sec. 1245 property. If the building had been Sec. 1245 property the amount of recapture would have been $30,000 ($200,000 − $170,000). Thus, the Sec. 291 ordinary income is $30,000 × 20% = $6,000. The remaining $44,000 is Sec. 1231 gain. Note: The entire gain is not Section 1231 gain. The asset is a section 1231 asset. But the gain from the sale of the asset is: Ordinary income to the extent of recapture 25% unrecaptured gain Section 1231 gain Only part "c" can be netted against other Section 1231 gains and losses, not the entire amount of the gain.

Thayer Corporation purchased an apartment building on January 1, 2016, for $200,000. The building was depreciated using the straight-line method. On December 31, 2019, the building was sold for $220,000, when the asset balance net of accumulated depreciation was $170,000. On its 2019 tax return, Thayer should report A. Section 1231 gain of $42,500 and ordinary income of $7,500. B. Section 1231 gain of $44,000 and ordinary income of $6,000. C. Ordinary income of $50,000. D. Section 1231 gain of $50,000.

C Correct! Qualified residence interest consists of interest on acquisition indebtedness. Beginning in 2019, interest on home equity indebtedness is not deductible, even if the loan was taken out before 2019.

The Browns borrowed $20,000 in 2018, secured by their home, to purchase a new automobile. At the time of the loan, the fair market value of their home was $400,000, and it was unencumbered by other debt. The interest on the loan qualifies in 2019 as A. Deductible personal interest. B. Deductible qualified residence interest. C. Nondeductible interest. D. Investment interest expense.

C This answer is correct. As sureties, the owners are immediately liable on the debts if the corporation defaults. No notice need be given them.

The Martin Corporation was a small family-owned corporation whose owners were also the directors and officers. The corporation's bankers insisted that if any further credit were to be extended to the corporation the owners must guaranty payment by the corporation. This guaranty was agreed to by the owners in writing, and an additional $50,000 loan was granted to Martin Corporation. Which of the following best describes the legal significance of these events? A. The guaranty by the owners need not have been in writing since it was primarily for their own benefit. B. Once the owners agreed to the undertaking they automatically assumed responsibility for all of the corporation's prior debts. C. In the absence of specific provisions to the contrary, the owners are immediately liable on the debt in the event of the corporation's default. D. Since the owners each participated equally in the guaranty, each can be held liable by the bank, but only to the extent of his proportionate share in relation to the others.

D The Uniform Capitalization Rules do not apply to any taxpayer (other than tax shelters) that has $25 million or less in average gross receipts during the preceding three years.

The Uniform Capitalization Rules of Code Sec. 263A apply to retailers whose average gross receipts for the preceding three years exceed what amount? A. $ 1,000,000 B. $ 2,500,000 C. $ 10,000,000 D. $ 25,000,000

D The admission of a new general partner to a limited partnership under the Revised Uniform Limited Partnership Act requires the approval of all partners, including limited partners.

The admission of a new general partner to a limited partnership requires approval by I. A majority of the general partners. II. All of the general partners. III. A majority of the limited partners. IV. All of the limited partners. A. I only. B. II only. C. II and III only. D. II and IV only.

A This answer is correct. The federal estate tax may be reduced by a credit for death taxes. However, no federal estate tax credit is available for gift taxes, income taxes, or intangible property taxes.

The federal estate tax may be reduced by a credit for A. Foreign death taxes. B. Gift taxes on gifts made 2 years before death. C. Income taxes paid in the year of death. D. Intangible property taxes.

B Since self-employment earnings generally represent earnings derived from a trade or business carried on as a sole proprietor, the $10,000 of interest income from personal investments would be excluded from the computation. On the other hand, a self-employed taxpayer is allowed a deemed deduction equal to 7.65% of self-employment earnings in computing the amount of net earnings upon which the tax is based. The purpose of this deemed deduction is to reflect the fact that em-ployees do not pay FICA tax on the corresponding 7.65% FICA tax paid by their employers. Gross receipts from business $150,000 Cost of goods sold (80,000) Operating expenses (40,000) Self-employment earnings $ 30,000 Less deemed deduction (100% − 7.65%) × 92.35% Net earnings to be multiplied by self-employment tax rate $ 27,705

The following information pertains to Joe Diamond, a cash-method sole proprietor for the current year: Gross receipts from business $150,000 Interest income from personal investments 10,000 Cost of goods sold 80,000 Other business operating expenses 40,000 What amount of net earnings from self-employment would be multiplied by the applicable self-employment tax rate to compute Diamond's self-employment tax for the current year? A. $25,410 B. $27,705 C. $30,000 D. $40,000

D If you answered B, it is wrong. The appraisal fee is considered an expense of determining the Hoyts' tax liability; it is not a part of the casualty loss itself. It is classfied as a 2% miscellaneous itemized deduction, which is no longer deductible after 2017.

The following is 2019 information pertaining to Sam and Ann Hoyt, who filed a joint federal income tax return for the calendar year 2019. The Hoyts had adjusted gross income of $34,000 and itemized their deductions for 2019. Among the Hoyts' cash expenditures during 2019 were the following: $2,500 repairs in connection with 2019 fire damage to the Hoyt residence. This property has a basis of $50,000. Fair market value was $60,000 before the fire and $55,000 after the fire. Insurance on the property had lapsed in 2018 for nonpayment of premium. $800 appraisal fee to determine amount of fire loss. The appraisal fee to determine the amount of the Hoyts' fire loss was A. Deductible from gross income in arriving at adjusted gross income. B. Subject to the 2% of adjusted gross income floor for miscellaneous itemized deductions. C. Deductible after reducing the amount by $100. D. Not deductible.

D If you selected C, it is wrong. The amount of a nonbusiness casualty loss is computed as the lesser of (1) the adjusted basis of the property, or (2) the property's decline in FMV; reduced by any insurance recovery, and a $100 floor. If an individual has a net casualty loss for the year, it is then deductible as an itemized deduction to the extent that it exceeds 10% of adjusted gross income. Lesser of: Adjusted basis = $50,000 Decline in FMV ($60,000 − $55,00 = $ 5,000 $ 5,000 Reduce by: Insurance recovery (0) $100 floor (100) 10% of $34,000 AGI (3,400) Casualty loss itemized deduction $ 1,500 Note that the $2,500 spent for repairs is not included in the computation of the loss.

The following is 2019 information pertaining to Sam and Ann Hoyt, who filed a joint federal income tax return for the calendar year 2019. The Hoyts had adjusted gross income of $34,000 and itemized their deductions for 2019. Among the Hoyts' cash expenditures during 2019 were the following: $2,500 repairs in connection with 2019 fire damage to the Hoyt residence. This property has a basis of $50,000. Fair market value was $60,000 before the fire and $55,000 after the fire. Insurance on the property had lapsed in 2018 for nonpayment of premium. The area was declared a federal disaster area. $800 appraisal fee to determine amount of fire loss. What amount of fire loss were the Hoyts entitled to deduct as an itemized deduction on their 2019 return? A. $5,000 B. $2,500 C. $1,600 D. $1,500

A This answer is correct. Income from operations is considered ordinary income and as such would be included in the calculation. Tax-exempt interest, dividends, and net rental income must be separately stated and allocated to the partners and are thus excluded from the computation of ordinary income. Therefore, total ordinary income for the partnership is $156,000.

The partnership of Felix and Oscar had the following items of income during the current taxable year Income from operations $156,000 Tax-exempt interest income 8,000 Dividends from foreign corporations 6,000 Net rental income 12,000 What is the total ordinary income of the partnership the current taxable year? A. $156,000 B. $174,000 C. $176,000 D. $182,000

C The $1,000,000 distribution is taxable as dividend income to the extent of ABC's earnings and profits of $750,000. The remaining $250,000 of the distribution reduces the shareholders' bases in their stock (which is substantial since there is $10,000,000 of paid-in-capital).

This year ABC Corporation, a calendar-year, accrual-basis corporation, made a nonliquidating cash distribution to its shareholders of $1,000,000 with respect to its stock. At that time ABC's current and accumulated E&P totaled $750,000 and its total paid-in capital for tax purposes was $10,000,000. Since ABC had no corporate shareholders, the distribution: A. was taxable as $750,000 in dividend income to its shareholders. B. reduces its shareholders' adjusted basis in the ABC stock by $250,000. C. Both of the above are correct. D. None of the above are correct.

C An agency relationship terminates as a matter of law as soon as one is adjudicated incompetent. Note that a person simply acting irrationally or "crazy" does not automatically end the relationship; it is the court proceeding that is important.

Thorp is a purchasing agent for Ogden, a sole proprietor, and has the express authority to place purchase orders with Ogden's suppliers. Thorp places an order with Datz, Inc. on Ogden's behalf, after Ogden was declared incompetent in a judicial proceeding. Thorp was aware of Ogden's incapacity. Which of the following statements is correct concerning Ogden's liability to Datz? A. Ogden will be liable, because Datz was not informed of Ogden's incapacity. B. Ogden will be liable because Thorp acted with express authority. C. Ogden will not be liable, because Thorp's agency ended when Ogden was declared incompetent. D. Ogden will not be liable because Ogden was a non‐disclosed principal.

D To qualify as an exempt organization, the applicant must not be a private foundation organized and operated exclusively to influence legislation pertaining to protection of the environment. Exempt status is specifically denied to organizations if a substantial part of their activities consists of "carrying on propaganda, or otherwise attempting, to influence legislation," if expenditures exceed certain amounts.

To qualify as an exempt organization, the applicant A. May be organized and operated for the primary purpose of carrying on a business for profit, provided that all of the organization's net earnings are turned over to one or more tax exempt organizations. B. Need not be specifically identified as one of the classes upon which exemption is conferred by the Internal Revenue Code, provided that the organization's purposes and activities are of a nonprofit nature. C. Must not be classified as a social club. D. Must not be a private foundation organized and operated exclusively to influence legislation pertaining to protection of the environment.

A In addition to their own expenditures, taxpayers are allowed to deduct the qualified medical expenditures of their spouse and dependents. Qualified medical expenditures include those incurred for diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body. The cost of inpatient care (including meals and lodging) also is a qualified medical expenditure. If the institution furnishes medical care but is not a hospital, the expenditures are qualified medical expenditures as long as the individual is at the institution primarily for the medical care, and the meals and lodging costs are necessary incidents of the care. All of the Whites' medical expenditures were for their dependent child, so they may claim a deduction for any qualified medical expenditures. Since special equipment, such as wheelchairs, help mitigate a person's disease, the cost of such equipment is considered a qualified medical expenditure. Therefore, the Whites may claim a deduction for the $600 spent on the repair and maintenance of their child's motorized wheelchair. The Whites also may deduct the $8,000 spent on tuition, meals, and lodging at the special school for their child because their child attends the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care. Thus, without regard to the 10% of adjusted gross income floor applicable to medical expenditures, the Whites may claim $8,600 on their 2019 return as qualifying medical expenses.

Tom and Sally White, married and filing joint income tax returns, derive their entire income from the operation of their retail stationery shop. Their 2019 adjusted gross income was $100,000. The Whites itemized their deductions on Schedule A for 2019. The following unreimbursed cash expenditures were among those made by the Whites during 2019: Repair and maintenance of motorized wheelchair for physically handicapped dependent child $ 600 Tuition, meals, and lodging at special school for physically handicapped dependent child in an institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care 8,000 Without regard to the adjusted gross income percentage threshold, what amount may the Whites claim in their 2019 return as qualifying medical expenses? A. $8,600 B. $8,000 C. $600 D. $0

C Correct! Tribble owes 5% of $60,000 ($3,000) times 4 (the number of months late), which multiplies out to $12,000.

Tribble carelessly filed his taxes four months late. He owed $60,000 in taxes. What is his late filing penalty? A. $120,000 B. $60,000 C. $12,000 D. $9,500

B The preemptive right gives the shareholder the right to purchase newly issued stock so as to keep the same overall percentage of ownership of the corporation. The Revised Model Business Corporation Act only provides this right if it is set forth in the Articles of Incorporation. The right to a proportionate share of assets upon dissolution is a right that all shareholders have and is not limited to preemptive shareholders.

Under the Revised Model Business Corporation Act, when a corporation's Articles of Incorporation grant stockholders preemptive rights, which of the following rights is (are) included in that grant? The right to purchase a proportionate share of a newly issued stock ------------------------The right to a proportionate ------------------------share of corporate assets -----------------------remaining on corporate ------------------------------dissolution A.---- Yes-----------------Yes B.---- Yes-----------------No C.---- No-----------------Yes D. ---No------------------No

B Under RUPA, partnership property not only in-cludes property purchased in the partnership name but also includes property purchased by a partner, who is an agent of the partnership, with partnership funds. Note that a partner may use property in the partnership business without it becoming partnership property.

Under the Revised Uniform Partnership Act, in which of the following cases will property be deemed to be partnership property? I. A partner acquires property in the partnership name. II. A partner acquires title to it in his/her own name using partnership funds. III. Property owned previously by a partner is used in the partnership business. A. I only. B. I and II only. C. II only. D. I, II, and III.

A The UCC gives the seller a choice of many remedies when the buyer breaches the contract involving a sale of goods. These remedies include allowing the seller to resell the goods identified to the contract and to recover the amount that the seller receives that is less than the contract price. Also, once the buyer breaches, the seller may suspend his/her performance and may prevent the carrier from making the delivery of the goods.

Under the Sales Article of the UCC, the remedies available to a seller when a buyer breaches a contract for the sale of goods may include The right to resell goods identified to the contract -------------------------------------The right to stop -------------------------------------a carrier from ---------------------------------delivering the goods A) Yes---------------------------------Yes B) Yes----------------------------------No C) No---------------------------------Yes D) No---------------------------------No

A If you answered B, the answer is incorrect. Criminal liability of a fine may also be assessed.

Under the Securities Exchange Act of 1934, which of the following penalties could be assessed against a CPA who intentionally violated the provisions of Section 10(b), Rule 10b-5 of the Act? Civil liability of monetary damages -------------------------Criminal liability of a fine A. Yes----------------------Yes B. Yes----------------------No C. No-----------------------Yes D. No----------------------No

C This answer is correct. The requirement is to identify the duty of a gratuitous agent. The fiduciary duties of a gratuitous agent are the same as the duties of an agent who is compensated. Under a gratuitous agent's duty to account, s/he must account to the principal for profits and everything that rightfully belongs to the principal including the principal's property. However, the agent has a duty not to commingle funds.

Under the agent's duty to account, which of the following acts must a gratuitous agent perform? Commingle funds Account for the principal property A. Yes Yes B. Yes No C. No Yes D. No No

D This answer is correct. Under the cash method of tax accounting, income is reported (i.e., recognized) when first actually received or constructively received either in cash or in property. In the case of property, the FMV of the property received is the amount to be reported. Constructive receipt means that an item of income is unqualifiedly available without restriction (e.g., interest resulting from a savings account is reported as income for the year in which the interest is credited to the account).

Under the cash method of reporting, an individual should report gross income A. Only for the year in which income is actually received in cash. B. Only for the year in which income is actually received either in cash or in property. C. For the year in which income is either actually or constructively received in cash only. D. For the year in which income is either actually or constructively received either in cash or in property.

A This answer is correct. A decedent's gross estate generally includes all property in which the decedent had an ownership interest at time of death, including the value of revocable transfers, as well as all transfers over which the decedent had, at the time of death, the power to change the enjoyment of what was transferred by altering, amending, revoking, or terminating an interest. Thus, a decedent's gross estate would include the value of a revocable trust at its date-of-death or alternate valuation date value.

Under which of the following circumstances is trust property with an independent trustee includible in the grantor's gross estate? A. The trust is revocable. B. The trust is established for a minor. C. The trustee has the power to distribute trust income. D. The income beneficiary disclaims the property, which then passes to the remainderman, the grantor's friend.

A This answer is correct because if an agent acts without authority, neither the principal nor the third party is bound to perform the contract. However, if Lux ratified Wallace's unauthorized act before Doolittle withdrew from the contract, Doolittle would be bound by the agreement.

Wallace, an agent for Lux, made a contract with Doolittle which exceeded Wallace's authority. If Lux wishes to hold Doolittle to the contract, Lux must prove that A. Lux ratified the contract before withdrawal from the contract by Doolittle. B. Wallace was acting in the capacity of an agent for an undisclosed principal. C. Wallace believed he was acting within the scope of his authority. D. Wallace was Lux's general agent even though Wallace exceeded his authority.

A This answer is correct because the doctrine of respondeat superior provides that an employer is responsible for the torts committed by employees in the normal scope of duties.

What is the doctrine under which a corporation is made liable for the torts of its employees, committed within the scope of their employment? A. Respondeat superior. B. Ultra vires. C. Estoppel. D. Ratification.

This answer is correct. For tax years beginning after December 31, 2009, the adjusted gross income and filing status limitations have been eliminated for rollovers from a traditional IRA to a Roth IRA. Even high-income taxpayers can convert a traditional IRA to a Roth IRA.

What is the maximum amount of adjusted gross income that a taxpayer may have for 2019 and still qualify to roll over the balance from a traditional individual retirement account (IRA) into a Roth IRA? A. $150,000 B. $100,000 C. $75,000 D. A rollover to a Roth IRA is not subject to an adjusted gross income limitation.

A This answer is correct. A corporation cannot deduct a net capital loss. Instead, the net capital loss is carried back three years and forward five years as a short-term capital loss to offset capital gains in the carryback and carry forward years.

What is the maximum amount of capital losses in excess of capital gains that a C corporation may deduct in a year? A. $0 B. $3,000 C. $5,000 D. $10,000

A If you answered B, the answer is incorrect because the corporation can always be held liable for acts of the directors within their normal scope of duties.

What is the most likely effect if a court pierces the corporate veil? A. The corporation's shareholders can be assigned liability for the corporation's debts. B. The corporation can be held liable for acts of the directors. C. The corporation can lose its tax-exempt status. D. The corporation can be held liable for acts of nonofficer employees of the corporation.

B This answer is correct. When a CPA fails to carry out his/her obligations under a contract for services, the CPA may be held liable based on breach of contract but not strict liability. The theory of strict liability is used in some product liability cases but is not applicable when deciding the liability of the CPA.

When CPAs fail in their duty to carry out their contracts for services, liability to clients may be based on Breach of contract Strict liability A. Yes Yes B. Yes No C. No Yes D. No No

A Correct! Curt's adjustments consist of the $600 of excess depreciation and the personal property taxes of $2,500, a total of $3,100.

When determining his federal income tax, Curt had the following items for 2019: Itemized deduction for personal property taxes 2,500 Charitable contribution of capital gain property 1,500 Net long-term capital gain 1,000 Excess of MACRS depreciation on personal property over depreciation computed using the 150% declining-balance method 600 Tax-exempt interest from City of Chicago general obligation bonds 400 What is the total amount of adjustments to taxable income for purposes of computing Curt's alternative minimum tax for 2019? A. $3,100 B. $7,250 C. $7,200 D. $7,800

D Unrelated business income (UBI) is income derived from any trade or business, the conduct of which is not substantially related to the exercise or performance of an organization's exempt purpose. For a trade or business to be "related," the conduct of the business activity must have a causal relationship to the achievement of the exempt purpose. A business activity will be "substantially related" only if the causal relationship is a substantial one. Assuming that the development and improvement of its members is one of the purposes for which a trade association is granted an exemption, the sale of publications used as course materials for the association's seminars for its members would be substantially related.

Which of the following activities regularly carried out by an exempt organization will not result in unrelated business income? A. The sale of laundry services by an exempt hospital to other hospitals. B. The sale of heavy-duty appliances to senior citizens by an exempt senior citizen's center. C. Accounting and tax services performed by a local chapter of a labor union for its members. D. The sale by a trade association of publications used as course materials for the association's seminars that are oriented towards its members.

B The release or impairment of collateral injures a surety's interest since a surety would acquire rights against the collateral upon paying the off the debt. Accordingly if collateral is released or impaired, then the surety's obligation is reduced by the value of the collateral or by the amount of the impairment.

Which of the following events will reduce a surety's liability to the creditor? A. The principal debtor was involuntarily petitioned into bankruptcy. B. The creditor failed to notify the surety of a partial surrender of the principal debtor's collateral. C. The creditor was adjudicated incompetent after the debt arose. D. The principal debtor exerted duress to obtain the surety agreement.

C Small exempt organizations whose gross receipts are $50,000 or less are generally eligible to annually file an electronic Form 990-N (e-Postcard) listing the organization's legal name, mailing address, and employer identification number. Exceptions apply to churches and exempt organizations that are required to file a different form. Churches do not have to file an annual information return. A private foundation must annually file Form 990-PF, Return of Private Foundation. An exempt organization having gross income of $1,000 or more from an unrelated business must file Form 990-T, Exempt Organization Business Income Tax Return.

Which of the following exempt organizations would be eligible to satisfy its annual filing requirement by filing Form 990-N (e-Postcard)? A. Church B. Private foundation C. An exempt organization with $20,000 of gross receipts D. An exempt organization with $3,500 of gross income from an unrelated business

C This answer is correct. Generally, the AAA represents the cumulative total of an S corporation's income items, less expenses and distributions. The AAA would be increased by interest and dividend income, and would be reduced by charitable contributions and distributions. Capital contributions would have no effect on the AAA.

Which of the following increases the accumulated adjustments account of an S corporation? A. Capital contributions by the shareholders B. Distribution to shareholders C. Interest and dividends D. Charitable contributions

C This answer is correct. Generally, the AAA represents the cumulative total of an S corporation's income items, less expenses and distributions. The AAA would be increased by interest and dividend income, and would be reduced by charitable contributions and distributions. Capital contributions would have no effect on the AAA.

Which of the following increases the accumulated adjustments account of an S corporation? A. Capital contributions by the shareholders B. Distribution to shareholders C. Interest and dividends D. Charitable contributions

C The requirement is to identify a prerequisite for the creation of an agency relationship. The principal must be able to give legal consent.

Which of the following is a prerequisite for the creation of an agency relationship? A. Consideration must be given. B. The agent must have capacity. C. The principal must have capacity. D. The consideration must be in writing.

C The Articles of Incorporation may be amended by the shareholders' vote, not by the board of directors.

Which of the following is not a power of the board of directors? A. May select the officers of the corporation. B. May declare the dividends to be paid to the shareholders. C. May amend the Articles of Incorporation. D. All of the listed choices are powers of the board of directors.

C This answer is correct. Expert authority is not a term used to describe how an agent might have authority to bind the principal.

Which of the following is not a type of authority of an agent that a third party can expect to encounter? A. Apparent. B. Express. C. Expert. D. Implied.

D If you answered B, it is Incorrect. Only the mortgage interest where the loan proceeds were used to improve the home is deductible.

Which of the following itemized deductions are deductible when computing the alternative minimum tax (AMT) for individuals? A. State income taxes B. Home equity mortgage interest when the loan proceeds were used to purchase an auto C. Real estate taxes D. Home equity mortgage interest when the loan proceeds were used to add an additional room to the house

D If you answered C, it is wrong. For purposes of computing an individual's AMT, no deduction is allowed for unreimbursed employee expenses.

Which of the following itemized deductions are deductible when computing the alternative minimum tax for individuals? A. State income taxes. B. Home equity mortgage interest when the loan proceeds were used to purchase an auto. C. Unreimbursed employee expenses. D. Gambling losses.

C This answer is correct. A partner's distributive share of partnership losses is generally deductible by the partner to the extent of the partner's basis in the partnership at the end of the taxable year. Additionally, the deductibility of partnership losses is limited to the amount of the partner's at-risk basis, and will also be subject to the passive activity loss limitations if they are applicable. Note that the at-risk and passive activity loss limitations apply at the partner level, rather than at the partnership level.

Which of the following limitations may apply in determining the allowable deduction for a partner's distributive share of partnership losses? At risk Passive loss A. Yes No B. No Yes C. Yes Yes D. No No

B This answer is correct. Generally, a gift tax return must be filed by a donor if the donor makes a taxable gift (e.g., a gift of a future interest, or a gift of a present interest that exceeds the amount of annual exclusion [$15,000 for 2019]). In determining the amount of taxable gifts, there is an unlimited exclusion that is available for amounts paid on behalf of a donee to an educational organization for tuition, as well as for amounts paid on behalf of a donee to medical care providers for medical services. Thus, the $30,000 to a university for a spouse's tuition, $50,000 to a hospital for a parent's medical expenses and $80,000 to a physician for a friend's surgery would be fully excluded and would not require the filing of a gift tax return. In contrast, the gift of $40,000 to a university for a cousin's room and board would require the donor to file a gift tax return. That is because the $40,000 payment is a gift of a present interest in excess of the annual exclusion, and does not qualify for the unlimited exclusion because it is not a payment of tuition.

Which of the following payments would require the donor to file a gift tax return? A. $30,000 to a university for a spouse's tuition B. $40,000 to a university for a cousin's room and board C. $50,000 to a hospital for a parent's medical expenses D. $80,000 to a physician for a friend's surgery

C A gift in the form of payments for college books, supplies, and dormitory fees on behalf of an individual unrelated to the donor requires the filing of a gift tax return if the amount of payments exceeds the $15,000 for 2018 annual exclusion contrast, no gift tax return need be filed for medical expenses or college tuition paid on behalf of a donee, and campaign expenses paid to a political organization, because there are unlimited exclusions available for these types of gifts after the annual exclusion has been used.

Which of the following requires filing a gift tax return, if the transfer exceeds the available annual gift tax exclusion? A. Medical expenses paid directly to a physician on behalf of an individual unrelated to the donor B. Tuition paid directly to an accredited university on behalf of an individual unrelated to the donor C. Payments for college books, supplies, and dormitory fees on behalf of an individual unrelated to the donor D. Campaign expenses paid to a political organization

C The purchase of goods on a sale on approval allows the buyer to return the goods even if they conform to the contract. Therefore, the seller retains the title and the risk of loss until the buyer accepts the goods.

Which of the following statements applies to a sale on approval under the UCC Sales Article? A. Both the buyer and seller must be merchants. B. The buyer must be purchasing the goods for resale. C. Risk of loss for the goods passes to the buyer when the goods are accepted after the trial period. D. Title to the goods passes to the buyer on delivery of the goods to the buyer.

B If you answered D, the answer is incorrect because although the agent owes the principal a fiduciary duty, the reverse is not true.

Which of the following statements concerning agency law is not true? A. The agent owes a fiduciary duty to the principal. B. The agent's duties are by necessity based on contract law. C. The principal does not owe his/her agent fiduciary duties. D. The agent does not owe third parties with which the principal asks the agent to deal fiduciary duties.

B If you answered A, the answer is incorrect. Limited partners do not owe fiduciary duties to the partnership.

Which of the following statements is correct with respect to the differences and similarities between a corporation and a limited partnership? A. Directors owe fiduciary duties to the corporation and limited partners owe such duties to the partnership. B. A corporation and a limited partnership may be created only pursuant to a state statute and a copy of its organizational document must be filed with the proper state agency. C. Shareholders may be entitled to vote on corporate matters whereas limited partners are prohibited from voting on any partnership matters. D. Stock of a corporation may be subject to the federal securities laws registration requirements whereas limited partnership interests are automatically exempt from such requirements.

C This answer is correct. The UNICAP rules require that all costs incurred in purchasing or holding inventory for resale must be capitalized as part of the cost of the inventory. These costs include the costs of purchasing, handling, processing, repackaging, assembly, and warehousing. Service costs such as marketing, selling, distribution, and office maintenance are immediately deductible and need not be capitalized as part of the cost of inventory.

Which of the following types of costs are required to be capitalized under the Uniform Capitalization Rules of Code Sec. 263A? A. Marketing. B. Distribution. C. Warehousing. D. Office maintenance.

C The general business credit is a combination of several credits that provide uniform rules for current and carryback-carryover years. The general business credit is composed of the investment credit, work opportunity credit, alcohol fuels credit, research credit, low-income housing credit, enhanced oil recovery credit, disabled access credit, renewable electricity production credit, empowerment zone employment credit, Indian employment credit, employer Social Security credit, orphan drug credit, the new markets credit, the small employer pension plan start-up costs credit, and the employer-provided child care facilities credit. A general business credit in excess of the limitation amount is carried back one year and forward twenty years to offset tax liability in those years.

Which one of the following credits is not a component of the general business credit? A. Disabled access credit. B. Employer Social Security credit. C. Foreign tax credit. D. Work opportunity credit.

D This answer is correct. Contributions to an education IRA are not deductible, but withdrawals of earnings will be tax-free if used to pay the qualified education expenses of the designated beneficiary. The maximum annual amount that can be contributed to an education IRA is limited to $2,000, but the annual contribution is phased out for single taxpayers with modified AGI between $95,000 and $110,000, and for married taxpayers with modified AGI between $190,000 and $220,000. Contributions cannot be made to an education IRA after the date on which the designated beneficiary reaches age 18.

Which one of the following statements concerning an education IRA (Coverdell Education Savings Account) is correct in 2019? A. A taxpayer may contribute up to $2,500 to an education IRA (Coverdell Education Savings Account) to pay the costs of the designated beneficiary's higher education. B. Eligibility for an education IRA is not subject to income phaseout. C. Contributions can be made to an education IRA on behalf of a beneficiary until the beneficiary reaches age 21. D. Contributions to an education IRA are not deductible.

C Individual taxpayers are permitted to take a tax credit based solely on the number of their dependent children under age 17.

Which one of the following statements is not correct with regard to the child tax credit? A. The credit is $2,000 per qualifying child. B. The amount of credit is reduced if modified adjusted gross income exceeds certain thresholds. C. To qualify for the credit, a dependent child must be less than 16 years old. D. A qualifying child must be a U.S. citizen or resident.

A If you answer C, the answer is incorrect because the deduction would be less if investment interest expense exceeded net investment income.

Wilson, CPA, uses a commercial tax software package to prepare clients' individual income tax returns. Upon reviewing a client's computer-generated year 1 itemized deductions, Wilson discovers that the schedule's deductible investment interest expense is less than the amount paid by the taxpayer and the amount that Wilson entered into the computer. After analyzing the entire tax return, Wilson determines that the computer-generated investment interest expense deduction is correct. Why is the computer-generated investment interest expense deduction correct? I. The client's investment interest expense exceeds net investment income. II. The client's qualified residence interest expense reduces the deductible amount of investment interest expense. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

B Trusts and estates must make quarterly estimated tax payments, except that an estate is exempt from making estimated tax payments for taxable years ending within two years of the decedent's death.

With regard to estimated income tax, estates A. Must make quarterly estimated tax payments starting no later than the second quarter following the one in which the estate was established. B. Are exempt from paying estimated tax during the estate's first two taxable years. C. Must make quarterly estimated tax payments only if the estate's income is required to be distributed currently. D. Are not required to make payments of estimated tax.

D If you answered A, it is wrong. The alternate valuation date cannot be used if its use increases the value of the gross estate.

With regard to the federal estate tax, the alternate valuation date A. Is required to be used if the fair market value of the estate's assets has increased since the decedent's date of death. B. If elected on the first return filed for the estate, may be revoked in an amended return provided that the first return was filed on time. C. Must be used for valuation of the estate's liabilities if such date is used for valuation of the estate's assets. D. Can be elected only if its use decreases both the value of the gross estate and the estate tax liability.

D If you answered B, it is incorrect. An irrevocable agency need not be contained in a signed writing.

Wok Corp. has decided to expand the scope of its business. In this connection, it contemplates engaging several agents. Which of the following agency relationships is within the Statute of Frauds and thus should be contained in a signed writing? A. A sales agency where the agent normally will sell goods which have a value in excess of $500. B. An irrevocable agency. C. An agency which is of indefinite duration but which is terminable upon 1 months' notice. D. An agency for the forthcoming calendar year which is entered into in mid-December of the prior year.

D Under the Statute of Frauds, certain contracts must be contained in a signed writing to be enforceable. Among these is a contract that cannot be performed within 1 year. In a personal service contract, the 1-year period begins running at the time that the contract is formed, not at the time the service is to commence. A contract creating an agency relationship for the forthcoming year which is entered into in mid-December of the prior year could not possibly be performed within 1 year and, therefore, must be contained in a signed writing in order to be in compliance with the Statute of Frauds.

Wok Corp. has decided to expand the scope of its business. In this connection, it contemplates engaging several agents. Which of the following agency relationships is within the Statute of Frauds and thus should be contained in a signed writing? A. A sales agency where the agent normally will sell goods which have a value in excess of $500. B. An irrevocable agency. C. An agency which is of indefinite duration but which is terminable upon 1 months' notice. D. An agency for the forthcoming calendar year which is entered into in mid-December of the prior year.

C Correct! Since Case Corp. became a shareholder in Zinco Corp. and corporations are not permitted to be a shareholders in S corporations, Zinco Corp.'s S election would be terminated. The termination is effective as of the date the eligibility requirement is no longer met by the S corporation. Hence, Zinco Corp.'s S short year would be from January 1, 2019 to March 31, 2019. The amount of income allocated to Zinco Corp.'s S short year for 2019 is $76,500 − (90 days/365 days) multiplied by nonseparately computed income of $310,250.

Zinco Corp. was a calendar year S corporation. Zinco's S status terminated on April 1, 2019, when Case Corp. became a shareholder. During 2019 (365-day calendar year), Zinco had nonseparately computed income of $310,250. If no election was made by Zinco, what amount of the income, if any, was allocated to the S short year for 2019? A. $233,750 B. $155,125 C. $76,500 D. $0